How Much Interest Will $250,000 Earn in a Year?

If you have $250,000 invested, you’re off to a good start to building wealth. Knowing how much interest $250,000 will earn in a year can help you see how quickly you can grow your earnings by leaving your investments untouched.

Here’s how much interest $250,000 will earn and the factors that affect it.

How Much Interest Will $250,000 Earn in a Year?

How much interest $250,000 will earn in a year depends on how you invest it. Investors have options between conservative and risky investments, each paying different interest rates or returns.

  • High-Yield Savings Accounts Paying 5.00%: $12,500
  • Traditional Bank Savings Account Paying 0.45% Average: $1,075
  • REITs Paying 10.8% Average: $27,000
  • Stocks Paying 10.35% Average: $25,875

Choosing the right investment depends on your financial goals, risk tolerance, and how soon you need to access the funds.

Preferred Investment Options for $250,000

Choosing the best investment options for $250,000 depends on many factors.

Decide how liquid you need the funds (how fast you need to access them), how much risk you can handle, and how much interest you want to earn.

1. High-Yield Savings Accounts

High-yield savings accounts (HYSA) currently pay an average of 5% or more on balances. This is 10x to 12x the average savings rate.

HYSAs are liquid, meaning you can access the funds whenever needed. Of course, the longer you leave the funds untouched, the more interest they earn. Some banks also have limits regarding how many withdrawals you can make monthly, limiting it to six per cycle.

HYSAs are online banks, most of which don’t charge fees, but some may have a minimum required balance to earn higher interest rates. Always read the fine print to ensure you’ll receive the APY advertised.

¹Annual Percentage Yield (APY) is accurate as of 1/17/2024 and subject to change at the Bank’s discretion. The minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.

2. Certificates of Deposit

Certificates of Deposit (CD) are timed deposits. You invest the funds for a specific period, ranging from one month to 10 years. The bank pays a fixed interest rate for the term. However, if you withdraw funds early, you may pay a penalty equal to three months of interest.

You can find CDS at your local bank and online banks. Most online banks pay higher APYs because they have less overhead.

CDs are low-risk if you invest in an FDIC-insured bank that protects your funds up to $250,000 per depositor or $500,000 if you have a joint account.

3. Government and Corporate Bonds

Bonds are loans to the government or corporations in exchange for a fixed interest rate. The rates differ based on the term and the issuer.

For example, government-issued bonds are less risky and have lower returns. Corporate bonds are riskier but pay higher rates.

Bond interest rates generally vary from 2% to 5%. For example, currently, I bonds pay an average rate of 4.30%.

4. Dividend-Paying Stocks

Dividend-paying stocks are from companies that pay a portion of their profits to shareholders.

In 2023, the average dividend yield is 1.54% midway through the year. You can receive dividends throughout the year and cash them out or reinvest them to compound your earnings, increasing the rates and interest earned on $250,000 annually.

5. Real Estate Investment Trusts (REITs)

REITs are real estate company shares that investors can purchase to become real estate investors. You don’t have to physically own real estate with this investment. Instead, the real estate company does all the work, selling shares of its trust to investors.

REITs pay 90% of their profits to shareholders. Like any industry, real estate returns fluctuate, but the average 10-year return is 7.76% for equity and debt REITs combined.

Factors That Determine the Interest Earned on $250,000 in a Year

Many factors affect the interest earned on $250,000 in a year, including the interest rate, type of interest, and compound frequency.

Interest Rate

The higher the interest rate paid, the more interest you’ll earn. The average annual interest rate on most investments for $250,000 ranges between 2% and 5%, but riskier investments may pay more.

Type of Interest

The type of interest determines how much interest you earn in a year. For example, fixed rates pay the same rate throughout the term, whereas variable rates change based on the market.

Variable rates make it harder to predict your earnings, but they may pay higher rates if the market cooperates.

Compounding Frequency

The more frequently your earnings compound, the more interest you earn. Daily compounding is the most ideal but also the least common. Other options for compounding include monthly and annual.

Remember that compounding frequency isn’t the same as receiving the interest. For example, interest may compound daily but be paid monthly. This means the interest earnings accumulate, and you receive the total amount once per month.

Time Period

The longer your funds are invested, the more time they have to earn interest. For example, if you have $250,000 in a savings account for one year, you’d earn less interest on the account if you left the funds sitting for five years.

Account Type

Different types of accounts pay different returns. Stocks, for example, provide a rate of return, not an interest rate. On the other hand, savings accounts pay a fixed interest rate, allowing you to predict your returns based on the time you’ll leave the funds invested.

Inflation and Taxes

Inflation and taxes can also affect how much interest you earn on $250,000 in a year. High inflation rates decrease the dollar’s value, making your earnings worth less than before inflation increased.

Taxes play a role no matter the level of inflation. You must report all earnings from interest or investments and may need to pay taxes.

Your tax advisor can help you determine if you must pay capital gains taxes or if the earnings are a part of your ordinary income, such as interest income.

How To Calculate Earnings on $250,000 with a Given Interest Rate

If you know the factors involved in an investment, you can calculate the potential earnings.

Let’s take, for example, a $250,000 investment in a HYSA paying 5%, with interest compounding daily.

The formula for compound interest is: Principal(1 + R/N)^(N*T)

  • P = Principal
  • R = Rate
  • T = Time Invested
  • N = Compounding Frequency

So, for this example:

$250,000(1 + 0.05/12 ) ^ 12(1)
Interest = $12,790

Common Mistakes To Avoid When Optimizing Interest Earnings on $250,000

Avoid these mistakes when learning how much interest $250,000 will earn in a year. Getting too confident can lead to fewer earnings or even a loss if you aren’t careful.

  • Ignoring Risk: Each investment has a certain level of risk, even seemingly risk-free investments. Ensure you understand the risk and consider it when choosing your investments. For example, you may consider a lower-risk investment in exchange for the peace of mind it provides, even though the rate of return is lower.
  • Chasing Short-Term Gains: Making emotional decisions when investing can cost you thousands of dollars. Instead of going after ‘trendy investments’ or ‘hot tips,’ think long-term. Look for investments you can place your money in long-term and not react emotionally should there be a downturn.
  • Neglecting Diversification: Putting all your money into one investment is one of investors’ biggest mistakes. If that investment fails, you put your entire $250,000 at risk. Instead, diversify your funds across many investments so a loss in one may be offset by a gain in another as a best-case scenario. If not, you only risk a portion of your funds, not the entire amount, limiting your total loss.
  • Overlooking Fees: Fees often deplete earnings, especially when unaware of the ongoing costs. Pay close attention to commissions, expense ratios, and even bank fees for the money you deposit in HYSAs or CDs.
  • Not Completing Due Diligence: Always do your own research before investing your capital. Even if your best friend says it’s the ‘best investment he found,’ determine that for yourself. Not completing your due diligence could leave you with unpleasant surprises, such as fees or term requirements you didn’t know existed.

Frequently Asked Questions

Knowing how much interest $250,000 earns in a year is important, but there are other factors to consider.

Is $250,000 in Savings Good?

$250,000 in savings should more than cover your expenses in emergencies for several months to a year. If $250,000 in savings feels like too much, diversify your efforts, keeping at least three to six months of expenses liquid and investing the rest.

What Can I Do With $250k in Cash?

$250k in cash is more than enough to invest in almost any investment allowed for non-accredited investors. Because diversifying is always the best choice, consider putting money in savings, dividend stocks, CDs, bonds, and REITs.

How Long Will $250,000 Last in Retirement?

How long $250,000 will last you in retirement depends on many factors, including your lifestyle, the cost of living, and what other income sources you have.

Most people cannot live on $250,000 for their entire retirement, but it can be a great supplement with other sources, such as a pension, Social Security, or 401k.

Is $250k Enough To Retire?

$250,000 isn’t enough for most people to retire. It’s a good supplement, but the average person needs closer to $1 million or more to live even a basic lifestyle, retiring at 65.

Can I Live off the Interest of $250,000?

You can use the interest from your $250,000 for some living costs, but given the average 5% rate of return, that’s $12,790 per year.

Most people cannot live on such a small amount annually but can use it to supplement other income sources, leaving the $250,000 untouched so it can continue earning interest.

How Many People Have $250,000 in Savings?

Only 0.83% of people with savings accounts have over the $250,000 FDIC insurance limit out of the 860 million deposit accounts recorded, and 34% of Americans age 45 and older surveyed about retirement think they’ll have at least $250,000 saved for retirement.

Is $250k Considered Rich?

Rich is a relative term based on your cost of living. For some, $250,000 is more than enough to live on, but for most, it’s only a fraction of what they need to cover even the basics and don’t consider it rich.

However, if you make $250k per year and invest it aggressively, it can make you rich.

How Much Does a $250,000 Annuity Pay?

Annuity payments vary based on the age at which you purchase the annuity and begin taking payouts. For example, buying a $250,000 annuity at age 65 would pay $1,198 monthly, but buying it at 60 would pay $1,094.

What Will an Investment of $250,000 Be Worth Over Time?

The longer you keep your $250,000 invested, the more it will grow. Knowing how much interest $250,000 will earn in a year is good knowledge, but you should keep it invested to let the earnings compound.

Comments are closed here.