Congratulations, you’re a millionaire, and you found this site by asking Google: How much interest do you earn on a million pounds?
How did you make a million pounds?
Who knows. Perhaps you:
Won the lottery
Robbed a bank
Bought into and then (crucially) traded out of Bitcoin
Sold a small terraced house in central London
Married someone who owned a large terraced house then you got divorced
Invested your way to a million
However you did it, now you’ve got it. (Or you wish you did and you’re daydreaming…)
The question is how much interest do you earn on your million pounds?
Well, it depends. Let’s see.
How much interest will I earn on one million pounds in cash?
First things first: stop looking for the single best savings account for your million pounds.
Anyone who remembers the bank runs of 2007 during the financial crisis knows it’s better to have multiple savings accounts. Each account should ideally have no more than the guaranteed £85,000 compensation scheme limit in the UK.
Admittedly that’s going to mean you’ll need almost a dozen bank accounts to be entirely safe. Besides the hassle of opening so many accounts, you’ll have to accept it’s impossible to get the best interest rate with all of them.
And that’s important, because the interest rate is the most important variable that determines how much you will earn on your million pounds.
The key factors are:
The interest rate
How long you save it for without withdrawing any money
Whether you’re paid interest daily, monthly, or annually
1. What is the interest rate?
The higher the interest rate, the more your £1,000,000 will earn you in a year.
A 4% interest rate paid annually will earn you £40,742
A 6% interest rate paid annually will earn you £61,678
Over one year, this maths is not surprising. Keep your million quid safe and untouched for 30 years though, and even a small 2% difference will have huge consequences. More on that below.
2. How long will you wait before withdrawing any money?
The longer you leave your million pounds untouched, the more money you’ll earn at the end. This is due to compound interest, which really gets going over long time periods.
Compound interest means you earn interest on your interest
The longer you leave your money untouched, the more the interest rolls up and grows. You get interest on the original interest, and then interest on the interest ON the original interest. And so on!
We’ll see the difference it makes in a moment.
3. How often is the interest worked out and paid?
The interest due on your headline annual savings interest rate – 4% for example – can be calculated and paid by your bank on a daily, monthly, or annual basis.
Having smaller amounts of interest paid more regularly is better than getting a once-a-year lump sum. That’s because the interest you earn has more time to earn interest on itself when you get it sooner.
I’ll assume for this piece that your interest compounds monthly. This is the most common approach in my experience.
So, how much interest do you earn on a million pounds?
First, let’s assume an interest rate of 4%, compounded monthly.
Held for the following time periods, a million pounds will earn you:
A day: £110
1 month: £3,333
1 year: £40,742
5 years: £220,997
10 years: £490,833
20 years: £1,222,582
30 years: £2,313,498
What about a higher interest rate of 6%, compounded monthly?
1 year: £61,678
5 years: £348,850
10 years: £819,397
20 years: £2,310,204
30 years: £5,022,575
Remember we are looking at how much you earn on a million pounds here. Just the interest, and then the interest on the interest.
If you want to see how much you will end up with in your savings pot – including your initial million pounds – try our compound interest calculator.
Lessons for millionaire readers (and the rest of us)
Calculating how much interest you earn on a million pounds over the long-term – and at different interest rates – demonstrates two crucial things:
A small difference in the interest rate makes a big difference
Compound interest can grow your money by a huge amount over time
To illustrate the first point, look at the amount earned after 20 years in both examples above.
The 6% account has earned almost twice as much as the 4% paying account. That’s a huge difference from a seemingly tiny 2% rate gap.
As for my point about time, just look at the amount of money you’d have earned after 30 years at 6% interest.
Over £5 million!
Remember, you’d have your original £1 million, too. That means you’d have more than £6 million to your name after 30 years.
Higher interest rates for cash savers
Some good news here is that savings accounts are finally paying good interest rates again. Earning a 4% interest rate may soon be realistic, though it’ll probably be a while before we can earn 6% on our cash savings.
Note that if you’ve got a lot of cash, you may want to stash it in a cash ISA.
That’s because you’ll earn much more interest on a million pounds – or even on £100,000 – than is covered by the personal savings allowance. And you’ll be taxed on this income outside of an ISA.
Compound interest makes it possible
I remember the first time I encountered compound interest. It was in an article exactly like this one I’m writing, except I was reading it in an old-fashioned magazine instead of on a computer screen.
I almost dropped the magazine in shock.
The ability of money to roll up like this still seems to me a massive incentive to start saving and investing. It’s almost like getting free money.
One last example.
Let’s say you’re a 20-year old singer who records one hit single, tops the charts, makes a million, and then sticks your money in the bank at 6%.
If we assume you resist the temptation to spend your stash on wine, women (or men), and song, you could retire at 65 with nearly £14,000,000!
The bottom line: Working out how much you will earn on a million is a very nice problem to have.
P.S. Can you live off one million pounds?
What if you tried to live off the annual earnings of a million rather than letting it build up?
Things would be rather bleaker. The most you’d ever earn is the annual interest – so £40,000 a year from a 4% interest rate.
Nice, but it’s hardly going to pay for a millionaire lifestyle. And your million would never get compounded because you’d always be spending the interest.
As I’ve mentioned, you’d also have to pay tax on your interest. Tax rates vary around the world, but in the UK you’d pay between 20% and 40% tax on most of that income.
Worse, inflation will reduce the buying power of your £1,000,000.
Inflation tends to run at about 2-3% a year, although the high inflation of 2022 topped 11%. High inflation quickly makes both your million and the earnings on it worth less in real terms over time.
You’d still be earning £40,000 in 20 years on your million pounds, but it would buy far less stuff in practice. That would mean you’d be able to afford far fewer bottles of wine or holidays abroad.
Should you keep a million in cash or invest it?
Inflation is the main reason why living off the interest on a million pounds is not very realistic, unless you’re very old.
You’ll probably be better off in the long run if you invest your million pounds into a portfolio of income-producing assets.
Think cash, bonds, dividend paying shares, and property you rent out.
From moment you diversify into ‘real assets’ like shares and property your net worth will fluctuate. That can be painful in a down market for your assets. But your investment income will hopefully keep up with inflation over the long-term.
There can also be tax benefits with these alternatives to earning interest on a million pounds in cash.
You may need personal financial advice when that day comes – a million pounds is still a lot of money – but there’s no harm in dreaming in advance!
Not got your million pounds yet? Discover how (hard it is) to make a million by saving and investing.
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