Saving and investing money are two keys to building wealth. The more you have to save or invest, the more your money can grow as it earns interest. There’s a significant difference, for example, between saving $500 and $75,000. So how much interest does $75,000 earn per year? The answer can depend on where you’re keeping it and the interest rate you’re earning. While we analyze the details below, you may want to work with a financial advisor to help you build a plan that has the chance of earning enough for your long-term financial goals.
Simple vs. Compound Interest
Before calculating how much interest $75,000 can earn in a year, it helps to know a little about how interest works. There are two types of interest that apply when saving or investing: simple and compound interest.
Simple interest is interest that’s earned on the principal balance. It doesn’t factor in any additional interest you earn over time. If you deposit $1,000 into a savings account that earns a simple interest of 1%, you’d have $1,010. After two years, you’d have $1,020, assuming you make no additional deposits. At year three, you’d have $1,030 and so on and so on.
Compound interest factors in both your principal balance and the interest earned. You’ll often hear it referred to as the interest on your interest. So, say that you put the same $1,000 into a savings account earning 1% compound interest.
After year one, you’d have $1,010.05 if interest compounds daily. After two years, you’d have $1,020.20 and by year three, you’d have $1,030.45. You’re not adding any money to the account, but your balance ends up being higher over time, thanks to the power of compounding.
Knowing whether your money is in an account that earns simple or compound interest can help you estimate how much interest you could earn per year on $75,000. Now, let’s analyze how much money $75,000 can earn per year in a few popular interest-bearing accounts.
How Much Interest Does $75,000 Earn Per Year in a Savings Account?
Savings accounts are deposit accounts that you can use to hold the money you don’t plan to spend right away. You can open a savings account at a traditional bank, credit union or an online bank. The bank can pay you interest on those deposits for as long as you keep your money in the account.
The amount of interest you can earn on $75,000 per year in a savings account depends largely on where you decide to the bank. Traditional banks tend to offer low rates to savers. For instance, you might earn a 0.20% interest rate and annual percentage yield (APY) on deposits. Online banks, on the other hand, can offer substantially higher rates.
In a traditional bank offering a 0.20% interest a person would earn $150.15. By contrast, in an online bank offering 2% a person would earn $1,515.06.
Both calculations assume that interest compounds daily, which is typical of how savings accounts work. But as you can see, you’ll get a lot more interest for your money with the savings account offered by the online bank.
How Much Interest Does $75,000 Earn Per Year in a CD Account?
Certificate of deposit (CD) accounts are time deposit accounts. When you open a CD, you agree to keep your money in the account for a set time period. While the money is in the account it earns interest and when the CD matures, you can withdraw the money. CD rates can vary widely, depending on where you bank and the CD term. As a general rule, banks tend to offer higher rates for CDs with longer terms.
|What You Could Earn From $75,000 in a year on various CD terms|
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The higher the rate and the longer you leave the $75,000 in the CD, the more interest you can earn. The catch with CDs is that you typically can’t take the money out before maturity without paying an early withdrawal penalty. The penalty might be a flat fee or a percentage of the interest earned.
How Much Interest Does $75,000 Earn Per Year When It’s Invested?
Investing money can be more effective than saving it if you’re interested in getting the most growth possible. When you invest money, you put it into the market versus leaving it in the bank. You might build a portfolio that includes stocks, mutual funds, exchange-traded funds (ETFs) and bonds, depending on your needs and goals.
The value of your portfolio changes over time as the value of those investments changes. Ideally, your investments only go up in value year over year. The annualized rate of return you get can be specific to each type of investment you own.
Here’s how $75,000 might grow in a year based on how it’s invested:
- Stocks – at a 7% annualized rate of return would produce $5,250
- Bonds – at a 2.5% annualized rate of return would produce $1,875
- Real estate – at a 10% annualized rate of return would produce $7,500
Why do certain investments earn more interest than others? The simple answer is risk. Stocks can be riskier than bonds, which can produce a higher rate of return. Since bonds are safer, the returns are usually lower as there’s less risk involved. Understanding your risk tolerance can help you decide how to invest $75,000 or a different amount to reach your interest goals.
How to Get the Most Interest From Your Money
Maximizing your interest earnings means choosing the right place to keep your money, based on your goals. The safest investment approach for many is going to be a diversified portfolio. If you have $75,000 to work with, for example, you might want to keep $15,000 of that in the bank as an emergency fund and invest the remaining $60,000.
You could open traditional savings account at a brick-and-mortar bank. But you might get a better rate with a high yield savings account at an online bank. Online banks can also charge fewer fees than regular banks.
As for the remaining $60,000, you’ll need to decide how to invest it, based on the amount of risk you’re comfortable with. If you’re 30 years old, for example, then you might have a higher risk tolerance for stocks or real estate. You might put all of that $60,000 into those investments.
When choosing stocks, mutual funds or other securities, it’s important to consider the risk/reward profile. Something like a dividend stock, for example, can provide you with a steady monthly income. But you may not see huge gains with an established stock the way that you might with a growth stock. Of course, growth stocks may be a riskier bet.
The Bottom Line
How much interest does $75,000 earn per year? There’s no single answer, as these examples illustrate. Running the numbers on different savings accounts or different investments can help you to gauge how much interest you could earn when deciding where to keep your money. Your results will ultimately depend on where you put your money.
Financial Planning Tips
- Consider talking to your advisor about how to formulate a financial plan that incorporates both saving and investing if you’re not doing that already. If you don’t have a financial advisor, finding one doesn’t have to be a headache. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Aside from savings accounts and CD accounts, there are other options for earning interest on deposits. A money market account, for example, combines features of savings accounts and checking accounts. You can earn interest and make a limited number of withdrawals per month with an ATM card or paper checks. Interest-bearing checking accounts can also be convenient for earning a little interest on the money you plan to spend or use to pay bills.
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