Who wants to be a millionaire…? Plenty of people, is likely to be the answer! What if you could make even more money on top of this – how much interest on AUD $1 million invested in a bank might you expect to generate? You might be surprised – the quick answer is, you could make as high A$52,500 a year on $1 million if you were to invest it in a 24-month term deposit.
Whether you have won the lottery, saved up an enormous amount, stumbled across it, or inherited a large sum of money, it makes sense that you might wonder how far that cash would go.
However, as much as $1 million is on paper, the truth is that, depending on your age and lifestyle, it may not be enough to keep you going for the rest of your life. But, what about the interest? Surely the interest alone on $1 million would be enough to keep you going!
Before we take a closer look at these details, however, let’s consider how interest actually works in Australia and how it impacts that cool million.
Interest Income Calculator – Australia
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What is an interest rate?
Essentially, interest is the money that is paid by the borrower to the lender. It can be thought of simplistically as the cost of borrowing money. The higher the interest rate, the higher the cost to the borrower and the higher the income to the lender.
When you deposit your money in the bank, you are a lender to the bank. As a result the bank pays you for borrowing your money. By depositing your $1 million, or indeed any amount, in a bank, you will accrue interest on it. While the money is yours, keeping your money in a savings account, term deposit, or similar product, is effectively lending the money to the bank.
So, when the year is up, the bank will add money to your savings account based on the interest rate. The higher the rate, the more money you could accrue without having to lift a finger. It’s why there is often so much pressure on people to compare these rates when choosing deposit and other savings accounts!
The interest rate is the amount of interest that you will gain on your investment at that particular moment. Be warned, however, that interest rates rise and fall constantly. For example, a bank may set you up with a 6% interest rate for your first year of savings, but may drop this to as low as 4% for the year after.
It’s worth remembering that interest rates for banks change based on a variety of factors, so let’s dig a bit deeper into the issue.
Stock Market Returns Are Not Interest
The internet has a lot of misleading advice. Many articles will suggest that you can generate “interest” from investing in the stock market. Take a look at this screenshot from another website:
They claim you can make $96,352 in interest from investing in the S&P 500. This is plain wrong. Similarly, they claim a mutual fund can generate $47,804 in interest, which is also wrong.
The stock market generates returns in the form of dividends and capital gains and losses, but it never generates interest. Similarly bonds pay coupons (not interest), which can fluctuate. Additionally with bonds, there is always the risk of losing some or all of your capital if the borrower defaults. A mutual fund, which invests in stocks and/or bonds, can therefore never generate interest income for you.
The key difference between stock market returns and bank interest is that market returns fluctuate quite wildly and are never guaranteed; whereas interest income from a deposit in bank is relatively stable and in many cases can be guaranteed. Additionally, in the stock market you can lose all your capital. In a regulated bank, your odds of losing your capital is almost negligible. This is the basis of the modern financial system.
The interest you earn at a bank is on top of your deposit; and while your deposit may be locked in for a certain period of time, besides extremely rare (rarest of the rare) situations, you will never lose your capital.
What determines a bank’s interest rate in Australia?
Banks around the world determine their interest rates based on a few things, but in Australia, most banks tend to be led by the same common factor – the Reserve Bank of Australia’s (RBA) cash rate target.
The RBA carries out its monetary policy by influencing short-term interest rates. This rate affects those that banks across Australia that provide for both savings accounts and bank loans. Although they do not have to follow the RBA’s cash rate target by law, most Australian banks follow it, even as it rises and falls.
As most deposits and loans are at variable or short-term fixed rates, there is a quick and effective pass through of changes in the interest rates targeted by the RBA to deposit and lending rates offered to clients at a bank.
This makes sense – as it helps to keep bank rates and interest levels competitive. It also means that Australian banks are held accountable to a firm standard. If the RBA’s interest rate was much higher than a bank’s standard interest, it’s likely few would want to take advantage!
Let’s consider the current RBA cash rate target. Due to the current inflationary environment and geopolitical challenges across the globe, the cash rate for the has risen to 4.1% It’s been over 15 years since rates have been this high!
So, if you look to your bank, you will likely find that whatever rate they are offering on your savings account or bank loan will match that, or at least very closely. It’s to reflect the current economic struggles we’re all facing – with inflation on the rise, too.
So, to put that into an interest perspective, were you to put that $1 million AUD into a 3-month term deposit you would only earn 3% on it, which works out to A$30,000 per year. If however you picked a longer term, say a 24-month term deposit today, you will likely earn an interest of up to $52,500 per year on it! The longer you deposit the money for, the higher the interest rate you will get.
For each extra 0.1% interest rate, you can expect an additional $1,000 in interest income over the year.
Can I live off the interest of one million dollars in Australia?
Now that you know that you can earn money by just leaving it in a savings account, it is only natural to wonder whether or not you could live off of that money. Sadly, that is not likely to be the case.
While putting money in a savings account is a great idea, and you can get a significant amount of profit (depending of course on the interest rate that your bank has set), however, there will not be enough to live off in the long run. Therefore, if you have designs on retiring on a million – unless you are no longer working for a living, it’s unlikely to sustain you, as things stand.
First of all, banks typically only pay the interest once a year. You therefore would not have a set amount coming in each month. Secondly, if your money is tied up in a long-term deposit, you typically cannot access your money before the deposit matures. If you do try to access that money early, there is typically a penalty.
Simply put, becoming a millionaire isn’t as hallowed as it might seem – you’ll need significantly more before you can put your feet up for good. Sorry!
That said, you can make that million travel further – you just have to be careful with where you invest it.
How can I better ensure an income with my $1 million?
As wise as it is to keep money in savings, and as capable as banks are at providing competitive interest rates on savings while protecting your capital, you will sadly not be able to live off of the interest rates from your bank account alone. It’s a clear reason why so many people choose to invest in stocks and shares.
Even in the financial markets, there is a whole gamut of investment options – from low risk money market funds to much higher risk stock and bond funds. Stocks and bonds rise and fall in value, unlike your bank deposit. However, invariably, they can provide a little more in the way of a potential return. The return potential on 1 million Australian dollars is pretty unlimited – it all depends on the types of investment you choose, whether it’s likely to be impacted by macroeconomic forces, political change, and how much you put into your chosen company or resource.
Even if you know a little bit about investing in stocks and shares, you’ll likely have heard that diversification is important. But what does this actually mean?
Remember the phrase ‘don’t put all your eggs in one basket’? Crucially, diversifying investments follows this rule. If you were to put your whole million into Tesla tomorrow, for example, and the stock took a dip, you’d lose a large chunk of money. It may not affect you unless you cash out, but what if that value never bounces back?
Investing money in stocks, bonds, and commodities always carries risks. That’s why the best financial advisors and the most successful traders refer to diversification as the key to good financial health.
Tracker funds that are considered low risk, too, may be worth looking into if you are keen to experience the highs of the markets, but still want safety. ETFs, which bring together a variety of investments into viable bundles, are also appealing to those with a low-risk attitude.
Unfortunately, we have no way of telling you which stocks or commodities are likely the best for your money – it’s a wild and wonderful world out there!
Is it better to save your money or invest it?
Saving that $1 million in Australia doesn’t have to be a poor decision. In fact, it’s considered the safest choice – there’s no risk in your investment decreasing – you’d simply not get much back on your money in the long run.
This is a strong argument for investing a good chunk of that $1 million in the stock market – crucially, base interest savings will never help you achieve your dreams of never having to work again, unless you have a lot more capital to hand in the first place.
However, by investing your money in stocks, shares, ETFs and bonds, you do run the risk of losing it all. That’s why it always pays to discuss your potential investment plans with a financial advisor before you decide upon the best course of action. It also almost certainly pays to look at different types of fund and stock – and to diversify – in case your chosen stakes go south quickly.
So, the choice is yours. Do I keep my money safe, with no potential to grow substantially in a bank account? Or, do I invest my money either by myself, or with the help of a professional financial advisor?
Either way, that 1 million AUD could grow larger – you just need to carefully consider your options for investing that $1 million.
Even with $1 million deposited in an Australian bank, it could be better to do something with your money rather than let it sit. Of course, again, this depends entirely on what you want to do.
However, if being rich is your goal, it is important to note that the rich tend to stay this way by using their money wisely – they don’t have bottomless pits of cash to keep dipping into!
Even if you thought that the interest in your savings account could be enough to sustain you, remember that the cost of living in Australia is increasing – and that interest rates can and will go up and down at any time. Therefore, banking on a slight income from a A$1 million deposit might not be the best way to go, truth be told.
So, consider speaking to a financial advisor if you come into a significant amount of money and want to watch it grow. In fact, it is worth speaking to multiple advisors in order to get the best possible advice – build an average, overall picture of what to expect.
The most successful traders and wealthiest of businesspeople make their fortunes last by diversifying and actively growing their money. It’s not something you can sit back on and watch grow unless you have billions at play!
by Jon Craig
I am the creator of Project Financially Free and I started this journey to both educate myself and share my insights on personal finance. I’m passionate about financial literacy and I invite you to join me on this transformative path. See more.