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How much interest do you earn on a million pounds?

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? Perhaps:

  • You won the lottery
  • You robbed a bank
  • You sold a small terraced house in central London
  • You married someone who owned a large terraced house then you got divorced
  • Maybe you invested your way to a million?

So how much interest do you earn on your million pounds?

Well, it depends. Let’s see how.

Earnings on a million pounds if kept in cash savings

Let’s assume you found a bank you could trust with your million pounds, and you tucked the £1 million away.

Remember: Due to the bank runs that started with Northern Rock, it’s better to have several bank accounts, each with no more than the guaranteed £75,000 compensation scheme limit in the UK.

The factors that will determine how much you will earn on your million pounds are:

  1. The interest rate
  2. How long you save it for without withdrawing any money
  3. Whether you are 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, the maths is not surprising. Keep your million safe and untouched for 30 years though and even a 2% difference will have a huge consequences, as we’ll see below.

2. How long will you wait before withdrawing any money?

The longer you leave your million untouched, the more money you’ll have at the end. This is due to compound interest, which really increases over long periods of time.

  • Compound interest means you get interest on your interest

The longer you leave your money untouched, the more the interest rolls up and grows, as 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 below.

3. How often is the interest worked out and paid?

The interest due on your headline annual interest rate of, say, 4%, 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 having a once-a-year lump sum. I’ll assume below that your interest compounds monthly, as this is the most normal in my experience.

So, how much do you earn on a million pounds?

First, let’s assume an interest rate of 4%, compounded monthly.

Your million pounds will have earned:

1 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

Lessons for millionaire readers (and the rest of us)

These results show two things:

  1. A small difference in the interest rate makes a big difference
  2. 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 – the 6% account has earned almost twice as much as the 4% paying account. That’s a huge difference from such a seemingly tiny 2% difference.

As for the second point, look at the amount of money you have after 30 years at 6% interest – £5 million!

Remember, you’d have your original £1 million, too, which means you’d have over £6 million to your name.

I do realize it’s hard to earn an interest rate of even 4% on your cash these days, because interest rates have been very low for years. However if you’re prepared to take a bit more risk with your money, you can still earn over 5% with peer-to-peer lenders such as RateSetter or Zopa.

(You can get the equivalent of 14% on £1,000 with RateSetter once you know about a neat bonus offer.)

Compound interest makes it possible

I remember the first time I encountered compound interest – I was reading an article exactly like this one I’ve just written, but in a magazine in a newsagent rather than on a PC screen.

I almost dropped the magazine in shock.

The ability of money to roll up like this still seems to me the most amazingly motivating thing about saving and investing.

Another example – if you were a 20-year old singer who recorded one hit single tomorrow, topped the charts, made a million then stuck your money in the bank at 6% and resisted the temptation to spend it on wine, women and designer jeans, 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 nice problem to have.

P.S. Can you live off one million pounds?

What if you tried to live off the annual earnings of that million rather than letting it build up?

Things would be rather bleaker. The most you’d ever earn is the annual interest – £40,000 a year from the 4% interest rate. Nice, but it’s hardly going to fund a millionaire lifestyle. Your million would never get compounded because you’d always be spending the interest.

You’d also have to pay tax on your interest. Tax varies around the world, but in the UK you’d pay between 20 and 40% tax on most of that income. (One reason why it pays to start saving in an ISA).

Worse, inflation will reduce the buying power of your £1,000,000.

Inflation, which tends to run at about 2-3% a year, would make 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 less stuff. All other things being equal, you’d be able to afford far fewer bottles of wine or designer jeans.

Inflation is the main reason why living of the interest of a million pounds is not very realistic. You’re better off spreading your million between various income producing assets such as cash, bonds, dividend paying shares, and property that you rent out.

From moment you diversify into these ‘real assets’ your net worth will fluctuate in value, which can be painful, especially in a down market. But your investment income should be inflation-protected over the long-term.

There can also be tax benefits with these alternatives to earning interest on a million pounds in cash. Obviously this sort of thing requires specialist financial advice, but there’s no harm dreaming in advance!

Not got your million pounds yet? Read on to discover (how hard it is to) make a million by saving and investing.

Filed under: Monevation, Savings

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{ 41 comments… add one and remember nothing here is personal advice }
  • 1 RACHEL BELL-WEST August 14, 2009, 12:07 pm

    very interesting read, really easy to understand which makes a nice change

  • 2 Chris May 15, 2010, 6:52 am

    You should do a comparative article comparing compound interest, the stock market, and gold – to see which would have earnt more (in say the last 10 years). That would be very interesting

  • 3 The Investor May 15, 2010, 10:09 am

    @Chris – take a look at this article on historical asset class returns.

    I pretty much know the answer to your question from the top of my head (sad I know…) Gold would have been best, followed by cash, followed by equities.

    The noughties was a truly terrible decade for the stock market, but understand that makes it *more* not less likely the next decade will be better.

  • 4 John Burnside April 27, 2011, 7:59 pm

    Thanks for this post. I was looking for quite a while for someone to simply explain to me how the interest in savings accounts works and no one else explained it as well as you.

  • 5 Stuart Spindlow June 9, 2011, 12:52 pm

    I guess the first principle is not to put all your eggs in one basket. You should split it into various pots to spread the risk of something going wrong.

    Talking about risk, you also need to decide your attitude to risk. Risk and reward go hand in hand. My own view would be to have one or two high-risk pots, one or two low risk, and the other six as medium-risk.

    The other thing you need to decide is your investment timescale. If it’s a retirement fund and you’re in your 20s, it’s a completely different game to if you’re in your 60s.

    Having said all this, at present inflation-proofed investments and property look good to me, although I’d stay out of the domestic property market for a year or so until prices bottom out.

    But as you say how to invest a million is a nice problem to have 🙂

  • 6 Billy Boswell June 14, 2011, 8:36 pm

    Nice article, answered my ‘curious’ mind so I know now when I make my first million, just how to live off the annual interest.
    But NOT by selling 2nd hand cars!
    (-;

  • 7 Samn December 15, 2011, 12:13 pm

    All good – apart from this – “retire at 65 with nearly £14,000,000”.

    I’d say that’s bad advice — live off the interest. Enjoy your life while you are young. £40k a year is enough to do almost anything you want — especially when you think – you won’t be at work 9-5 for that money — it’ll come to you whatever you are doing – wherever you are.
    Why spend your life working – so you can have £14m when you are 65 – too old to really start any big project, or worse, only be able to use that £14m to pay for your health care, like paying for a room in a specialist dementia nursing home.
    If you are lucky enough to have £1m in your bank – live off the £40k – any you don’t spend – let that become your compound interest.

  • 8 The Investor December 15, 2011, 12:28 pm

    @Samn — Thanks for your comments. I wouldn’t say it’s bad “advice”, it’s just an observation. I am forever reading about one hit wonder pop stars and reality TV show contestants back stacking shelves at Tesco or similar. So I was simply pointing out what they forgo in a spend spend spend frenzy.

    Personally I’d use the one million to replace my formal salary, similar to what you suggest except I’d do it via a very diversified portfolio that will hopefully keep my capital intact after inflation. I’d then do a variety of interesting jobs, or possibly try to build up Monevator into a big site as may do job, or similar.

    I went through a period of not working and living off savings. It was incredibly boring and demotivating after the first couple of weeks. I’m not sure I’d do it at 65 now, let alone in my mid-30s when I did give it a go, and certainly not as our 20-something one-hit wonder.

    Financial freedom is brilliant. No motivation points the way to the grave, for me at least.

    Cheers for stopping by!

  • 9 fred February 5, 2012, 12:32 pm

    i am about to be made redundant with a pension of around £9500 and
    a lump sum of around £55,000 to invest. with no prospect of finding a job i will need an income off my savings. what will be the best and safe place to invest. also what tax will i have to pay?

  • 10 The Investor February 6, 2012, 1:46 pm

    @Fred — Sorry to here about your job loss. I’m afraid I can’t give individual advice, for both legal and ethical reasons.

    What I will say is the only thing that is “safe” to invest is cash. Everything else involves risk. (Cash involves interest rate risk (your income goes up and down) and the risk of devaluation through inflation, but in terms of guaranteeing its cash value, there’s only cash).

    For this reason, investors seeking an income generally have to move along the risk scale, diversifying their portfolios to try to manage down the overall risk, but there certainly being no guarantees.

    Here’s my best article on how to invest across the assets for an income:
    http://monevator.com/2008/02/15/try-saving-enough-to-replace-your-salary/

    Here’s an article on having an emergency fund, which you must earmark some of your cash for in my view:
    http://monevator.com/2009/10/01/emergency-funds-the-ten-essential-steps/

    Here’s HMRC’s page on taxes on income:
    http://www.hmrc.gov.uk/incometax/basics.htm

    Please do keep reading around the site, as we’ve covered tons of stuff — here’s our archive:
    http://monevator.com/archives-2/

  • 11 big steve April 18, 2012, 2:43 pm

    You could buy 10 flats for around 70,000 each renting at 500 per month making you 60,000 a year. Plus you would still have the flats to sell off whenever you wanted and 300,000 to buy a nice house and save. This would not work in London but where i come from this would be an excellent idea.

  • 12 Tom Conway June 13, 2012, 10:38 pm

    Re property purchase idea.
    This is sound had the same idea myself today to invest 3mill over
    12 years for income into a charitable trust. Long term security and of course you can enhance your portfolio as you go along. the return over time will be compound also.
    tks

  • 13 Tommy T August 15, 2012, 4:17 pm

    Excellent well done, 🙂

  • 14 Mike August 29, 2012, 10:54 pm

    I’m 33 with 1 million to invest. At the moment it’s just sat on deposit earning diddly squat. I want to invest without risking my capital. Where I live 2 bedroom apartments cost around £150K. I could potentially buy 6 and rent them for £800 PCM, which sounds lucrative, but one you allow for annual service charge, agents fees, ground rents, wear and tear and tax deduction, the net yield is around 4-5% (barely above inflation). Does anyone here think property prices are likely to increase over the next 30 years?

  • 15 The Investor August 30, 2012, 7:44 am

    @Mike — You can’t invest without risking your capital beyond a cash account (and do make sure you have your million spread between multiple accounts, as each account is only liable for £85,000 compensation each in the event of a banking crisis).

    Even safe government bonds can theoretically default. Generally the best idea is to diversify by investing widely across multiple asset classes for income.

  • 16 Kieran Woods November 13, 2012, 8:12 pm

    Hi im 16 and have 1.2million in my bank! I’m a national dance mat sensation from Madagascar and was wondering what would be the best way to invest my money with maximum returns. My older brother thinks gamble on all red, my mum thinks liquid bonds and dad believes compounding it for maximum interest is the best idea… I think im gonna go with the big bro’s advice but was wondering what you all think?

  • 17 James pink November 17, 2012, 8:23 pm

    Why is no one talking about the half life of money. In ten years the purchasing power of the £1 m would have halved. In the best example the £5m interest added to the original £1 m gives a fund of £6 m in today’s value but no one mentions the fact that due to half life applying three times over, the actual spending power will have halved three times = £750,000! Not such a hot investment!

  • 18 The Investor November 18, 2012, 12:30 pm

    Hi James — Inflation is indeed an important piece of the picture, but your maths is not quite right (or you’re too pessimistic about future inflation IMHO).

    Over the past 10 years, inflation has averaged about 2.7% (which was in fact above target). The real value of £1 million will deflate about half as fast as you suggest at that rate — it would be worth a little over £750,000 in today’s money in 10 years time.

    You can see the impact of inflation on your million pound plans by using our Millionaire Calculator tool.

  • 19 Chris March 13, 2013, 2:02 am

    I have only one question is there a limit to how much you put in a savings account in the UK ? so instead of saving a million if i saved 5million my interest would be much better than a million right ?

  • 20 The Investor March 13, 2013, 10:53 am

    @Chris — You’d have five times as much interest with £5 million, all things being equal. However there is a snag — you’d pay a higher rate of tax on the higher income. So it’d be a little less than 5x more, net to you.

    You can save £5 million in deposit accounts, but you’d probably have to (or be wise to!) spread it between several unconnected banks. You’re also only protected on the first £85,000 with each bank, and I am not sure you could find 50+ banks in the UK to get FSA protection on the whole £5 million (actually I suspect one couldn’t).

    In reality, with £5 million (or £1 million for that matter) you’d be best off investing in a mix of asset classes, including shares, property, bonds and so on. That’d give you a more tax efficient return, and also mean you’d be much more diversified at whatever life throws at you! 🙂

    Nice problem to have…

  • 21 Simon March 30, 2013, 8:30 am

    Hello – firstly, thanks for some great layman advice.

    I have just sold my company for 1.6 mil. I have no idea where best to invest this money, and at 34 yrs of age, it’s a worry and a stressful problem. I want to ensure the money lasts me and my family a long time, but want to have fun and enjoy it. Ill carry on working, maybe buy a nice house and a car. So I hope to be left with a million.

    Today’s financial climate feels risky, and uncertain. I don’t feel sure about any investment opportunity right now – and feel inclined to buy as much property as I can, in the hope my money stays safe.

    I’m thinking about buying property in the US – as surely things can only get better over there.

    So contrary to popular belief – it is actually quite stressful having a million or more pounds !

  • 22 The Investor March 30, 2013, 11:37 am

    @Simon — Congratulations on your success! A nice problem to have. 🙂

    I can’t give personal advice but if I were you and I wanted to make the money last productively I’d diversify beyond property. Try reading this article for thoughts — it’s more about the super rich with hundreds of millions, but it has lots of concepts:

    http://monevator.com/preservation-of-wealth/

    Here’s also an article on living off investment income. (Halfway through it is a link to an article on replacing your salary with investment income streams, so I’d read that too):

    http://monevator.com/how-to-live-off-investment-income/

    At 34 I’d be inclined as you say to carry on working but with this bedrock of security and the ability to afford a few more of life’s luxuries. Managed well it could do that for life. Nice!

  • 23 Harriet October 9, 2013, 12:07 am

    Clearly a site for a bunch of snobs to brag about their money, normal people can barely afford to buy one house …. With a mortgage!!!! And your worried about not making enough money on buying 6, this really makes me giggle!!

  • 24 The Investor October 9, 2013, 9:36 am

    Harriet, I take your point that not everyone has £1 million, obviously! I started with nothing. 🙂

    But why limit yourself? Why not aim high?

    I don’t think it is a matter of being a snob. Maybe you are being an inverse snob? 🙂

  • 25 Jack Rainbow October 18, 2013, 7:26 pm

    I don’t have any money but a friend has a few quid. she claims her capital ‘doesn’t earn anything’ because rates are so low. She would regard 4% earnings as high by comparison with what she gets. So – where are you getting 4% on your cash deposit, please?

  • 26 The Investor October 19, 2013, 8:58 am

    Hi Jack. Well, 4% is too high nowadays from a bank account, it’s true. I wrote this article several years back. The most you can get for looking your money away in a bank is currently about 3% if you lock your money away. But this won’t last forever — it’s the lowest interest rates for 300 years! So I don’t think it’s worth changing this particular article as sooner or later we’ll have higher rates again.

    All that said there *are* ways to get higher rates, with a bit more risk. For example I am getting an average of over 5% from Zopa. I also recently opened a Ratesetter account. These aren’t as safe as cash at all, but they are safer than they were. Your friend should read up on the pros and cons if she’s interested.

    You can also get over 4% from equity and bond funds etc, and from property. Much riskier though.

  • 27 2l2r January 28, 2014, 8:44 pm

    Hi
    Found my way over here from MMM. Currently considering moving back to the UK and living off investments ( balanced index fund most likely ) Here in the US a couple could have up to 70K in investment income tax free – see http://www.gocurrycracker.com/never-pay-taxes-again/. Anyone have any idea of how a similar approach might be worked in the UK for a couple looking to draw down about 50k stg/year.

    thanks

  • 28 The Investor January 28, 2014, 10:09 pm

    @2l2r — I’ve not done concrete numbers (might be a good subject for a future post actually) but that should be very doable for a couple. UK dividends are paid tax-free to basic rate income tax payers (ignore nonsense comments you’ll read about a 10% tax, it’s out of date and spurious):

    http://monevator.com/how-uk-dividends-are-taxed/

    …so if you’re happy to split your (sufficiently large) assets across both partners for 25K income each you should be there I think. You could also sell some of an appreciating fund every year to defuse capital gains tax and use your CGT allowances. Perhaps it would make sense to have some assets that looked for capital gains over income for this purpose (personally I’d use multiple funds anyway, to avoid the risk of one provider going belly up. Also investigate compensation limits etc) to keep you well within bands.

    This post on living off investment income might also help. If you’re still a tax payer it may make sense to put some of your assets in a SIPP — you’ll need to do your own research and maths — as that might be immediately enhancing if you can save tax on way in then withdraw a portion via a 25% tax-free lump sum, and the rest as income, but remembering you’ll need to keep an eye on where your marginal rate of tax is as a result.

    Personally I’d avoid complicated products (e.g. offshore bonds) sold by advisers etc, but some do say they’re worth looking into. I’m multiple decades from retirement and we don’t talk about traditional pension vehicles etc much on this site.

    While these scattergun thoughts can hardly even purport to be “financial advice”, please note they really *are not*. I don’t know your personal circumstances and am not legally qualified to advice anyway, so don’t take it as advice, just some thoughts for further research. 🙂

  • 29 2l2r January 28, 2014, 10:55 pm

    Thanks for the quick response, I did find a calculator after posting which suggests that each individual could in theory earn up to 42k in dividends tax free, allowing for personal allowance – http://www.which.co.uk/money/tax/guides/which-tax-calculator/.

    One comment above did jump out at me “(personally I’d use multiple funds anyway, to avoid the risk of one provider going belly up)”

    My plan was to use Vanguard in the UK, based on the assumption that the entity is similar in setup to its US parent. The important bit been

    From – http://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/

    “Because my assets are not invested in Vanguard. They are invested in the Vanguard Mutual Funds and, thru those, invested in the individual stocks, bonds and REITS those funds hold. Even if Vanguard were to implode (a vanishingly small possibility), the underling investments would remain unaffected. They are separate from the Vanguard company. As with all investments, these carry risk, but none of that risk is directly tied to Vanguard.”

    Maybe I need to dig a bit deeper into how Vanguard UK is setup?

    many thanks

  • 30 The Investor January 29, 2014, 10:02 am

    @2l2r — You will definitely find people who say that’s fine and there’s nothing to worry about.

    I am happily paranoid, as admitted in my post about assuming every investment can fail you.

    Personally I would always prefer to have at least two platforms, containing two different funds, from four totally unrelated companies, as an absolute minimum. (In reality I have five platforms/brokers and dozens of separate investments!)

    Let’s say the cost is my second choice ends up 0.2% more expensive on a TER basis every year. I think that’s absolutely worthwhile for the redundancy of spreading my risk. There’s a reason why nature gave us two kidneys, and two eyes. 😉

    Have a look at this post — it may be an eye-opener:

    http://monevator.com/investor-compensation-scheme/

    Vanguard is one of the greatest forces for investment good on the planet, and I pretty much trust no firm more than them. But I don’t trust anyone 100%. There’s always the potential for technical errors, if not fraud. And even if/when such incidences are eventually righted, you may have been locked out of your money for a period of time, which is a risk if you’re living off it.

    Of course some will say by increasing the number of platforms/funds you use, you also increase the chances that you’ll stumble into the one-in-100 that does go bust.

    Pays your money, takes your choice! Personally I am always astonished when I read those stories saying “The couple had placed their life savings in the XXX from YYY and now fear they have lost everything.”

    That will never be me.

  • 31 2l2r January 29, 2014, 2:05 pm

    Good points – always better to take the time to cover your @ss.

    regards

  • 32 2l2r January 29, 2014, 2:53 pm

    So I took the time to read your excellent article on compensation schemes and in my limited knowledge assume that the biggest difference between the UK and US is that most UK investors use 3rd party brokerage firms as opposed to opening an account directly with say Vanguard. This exposes them to brokerage risk as their money is pooled with other broker clients and individuals are not listed as owners.
    Where as management companies like Vanguard, Fidelity etc simply manage the assets and if they went bust, the fund itself as a separate entity would not be affected (other than needing to find a new management company). There is however still a slight risk of fraud or employee error that you mentioned but appears to be covered seperately

    Currently, the Vanguard funds are insured under a ‘blanket fidelity bond,’
    which insures the funds against the following losses:

    1) Dishonest or fraudulent acts of any officers or employees.
    2) Robbery, larceny, misplacement, damage, etc. of money or securities.
    3) Robbery or larceny of money and securities while in transit.
    4) Forgery or alteration of checks or other written instructions to pay
    monies.
    5) Purchasing or selling securities which have been forged, altered, or
    stolen.
    6) Fraudulent trading, either directly or indirectly, including all
    transactions involving the purchase or sale of securities.
    7) Computer fraud.

  • 33 The Investor January 29, 2014, 3:32 pm

    @2l2r — Any chance you could copy and paste your comment onto the end of the compensation scheme post? It’s more relevant there, and you might get some interesting feedback/info from other readers who have ‘subscribed’ to the comment thread. (I can’t move your comment there myself, unfortunately).

  • 34 Jimmywilkes January 30, 2014, 8:04 pm

    Why couldn’t you put 1million pound into a bank account in turkey and get 10% interest or s.africa at 6%. £350000 interest after 3 year in turkey

  • 35 The Investor January 30, 2014, 9:37 pm

    @Jimmy — Two words. Currency risk.

    http://monevator.com/currency-risk/

  • 36 Jack Rainbow May 24, 2014, 7:25 pm

    Look, don’t prevaricate or BS me, I’m tired of half answered questions. What happens if I win £1m, what can I hope to earn AFTER TAX from a bank deposit account, or, as you suggest, several accounts holding less than the government guaranteed amount?

  • 37 Jack Rainbow May 24, 2014, 7:30 pm

    I was told by someone else that I would only get about 1% after tax. Is that true?

  • 38 scott December 17, 2014, 12:20 pm

    so if you won the lottery how is that earning money every year? its not like your being paid it like job incom thats sort of how it read when your artical and to be honest wouldnt it be safer to just withdraw your winnings and put it in your own safe that way you have no risks but im sure if your amillion air and dont shout it out to the world and be smart by a affordable place that dosent cost much dosent screem your rich and have a personal safe only you can acces and know where it is and dont brag to people sort of be a incognito million air you could easly take your money out when you want and invest into stocks and hope to get more. some people dont need the large luxurious place to be happy

  • 39 Dreamer June 19, 2015, 4:01 pm

    Best explanation I’ve read yet. Very well done to the author of this article.

  • 40 Mike January 18, 2016, 1:06 pm

    Let’s say you set out with the intention of leaving a 1 million pound lump sum at a rate of 6%
    If the intention was to leave it for 30 years what’s to stop anything going pear shaped in that time with the bank or could that initial investment be moved around with the same if not better results?!

  • 41 James January 4, 2017, 7:26 am

    Thanks for this article, very insightfull – i love the idea of living off the £40K per year interest on the million, that’s a cool £3000+ per month which would do me very nicely thank you very much lol. But I also appreciate the advice about the devaluation of money and implications with that. It would be great to make your money work for you and know what bank will give you the best interest on your million.

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