Investing involves a series of constant trade-offs and careful planning, and there is no one-size-fits-all solution. Different investments will provide different potential payouts over time. So when you look at how much interest you can earn on $200,000, the answer is that it depends on the type of investment you put the money into. We will analyze the interest in some of the most popular options in this article. If you’re looking for help finding the right investment plan for your money, then you may benefit from talking to a financial advisor.
How much interest can $200,000 earn per type of investment
If you have $200,000 to invest, the amount of interest you can earn depends on your profile as an investor and the investments you choose. Many people often confuse the concept of repayments and interest payments. Returns are the money you can make from an investment by any method. Interest, on the other hand, only refers to payments you receive for a loan or other debt-related product. Interest can generate returns, but not all returns are interest payments.
Interest-bearing products have the advantage of security. However, this security also tends to limit their value, providing a modest annual percentage return (APY). Fixed income products tend to have low rates of return compared to other traditional investments such as stocks or mutual funds.
If this sounds like a good asset class for your portfolio, here are four common types of investments you can earn interest on and how much each typically pays:
Invest in bonds
Average Interest Rate/APY: 4.66%
$200,000 value over five years: $251,150
When large corporations and governments want to borrow money, they issue bonds. These bonds are loans that the institution agrees to repay in exchange for regular interest payments. The period of the loan is called the “maturity”.
For example, a company may issue a bond with a 10-year maturity and an interest rate of 5%. This means that for the next 10 years, the company will pay 5% of the loan to the bondholders every year. At the end of 10 years, it will repay the principal of the bond. If you buy one of these bonds for $1,000, you’ll get $50 a year until the bond’s maturity date, at which point you’ll get the $1,000 back.
For interest payments, bonds tend to offer some of the strongest yields on the market. However, they also pose a higher risk than other products. While it is rare for companies to default on their debts, it does happen.
Invest in Certificates of Deposits (CDs)
Average interest rate at time of writing: 0.03% – 0.39%
$200,000 value over five years: $203,931
A certificate of deposit, or “CD”, is a form of loan that you give to your bank. With this product, you deposit a certain amount of money in your bank on the condition that you cannot withdraw it for a specified period of time. In exchange for letting the bank lock up your money like this, you get a higher interest rate than you would on a regular savings account. The interest rate you get depends on how long you give the bank your money.
For example, at the time of writing the shorter CDs offer an average interest rate of 0.03% for 30 days. The longest typical product is a 60-month CD, which offers an average of 0.39%. Different institutions will offer different rates, however, and some investors can qualify for high-yield CDs if they invest enough.
A certificate of deposit offers just about the most security you can get from an investment product. This is insured by your bank and the FDIC, so you will almost certainly get your money back, but this is also a low-yield option. In fact, it’s so low-yielding that at the time of writing you’d be losing money relative to inflation if you put your money in a standard CD.
Invest in high-yield savings accounts
Average interest rate: 1%
$200,000 value over five years: $210,202
Traditionally, savers have had access to two types of accounts through their banks: checking and savings. A checking account offers the most liquidity, you can move money in and out of it as you like, while you also pay very little interest. A savings account offers some liquidity, but you generally have rules about how often you can move money in and out of savings each month. In exchange for this reduced access, you get a better interest rate. But it’s still not great, with an average savings account interest rate of 0.07%.
To compete with this, many online and alternative banks have started offering what is known as a “high yield savings account”. These are not standardized products, so we cannot guarantee what you will see in every case, but most of the time they are ordinary savings accounts. You have the usual high liquidity setup, with some rules about how often you can move money around each month. To attract businesses, they offer better interest rates than traditional banks. Usually, these interest rates are around 1%, but sometimes they can be closer to 2%.
Invest in Annuities
Average interest rate: 3%
$200,000 value over five years: $215,086
It is slightly misleading to compare annuities with short-term investments. These products are designed to work for decades rather than years, so you would be more likely to buy an annuity that paid you over a period of 20 years rather than just five. (In this case, you’d get $265,440 back.)
An annuity is an insurance product that is somewhat like a bond. The company selling you the annuity agrees to return your original investment with interest. However, with an annuity, the company repays both principal and interest at the same time. For example, if you buy a 20-year annuity, the company increases your principal with interest and issues payments every month for 20 years. The annuity is completed when your balance is paid in full.
The best version of annuities are products that you buy before the payout. For example, suppose you buy an annuity today that will start paying off in five years. Interest on this account will increase each year before repayment begins and will also increase while repayment continues. This allows you to collect much more than if you were to buy an annuity that started paying off today.
If you’re looking for interest payments on a $200,000 investment, generally your best options are to invest in bonds, annuities, or CDs. You can also look for high-yield savings accounts to maximize the value of your cash. All of these options pay an annual APY between 0.03% and 5%. While none of these options are going to significantly increase your total amount of money from the initial $200,000, the best option can increase it by $50,000 or more after five years, just from the interest earned.
Getting the right balance in your portfolio for your specific goals is important, but it can take a lot to figure out on your own. You may want to consider talking to a financial advisor who can help you sort this out. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, Get started now.
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