My very close friend and roommate in college recently had his uncle pass away. His uncle left him with 2 million dollars( honest, he was a lottery winner). He wants to invest in a certificate of deposit and simply live off the interest as long as he can. I actually thought this was smart that way he wont squander it all away in college. I think CD's offer 5% annually. If he had a 12 months cd and invested all 2 million... wouldnt that be $8,333 a month just in interest? I just want to check the math. Also, are there any limits on how much you can put into a CD?
2007-01-31 14:31:06 · 5 answers · asked by Jason K 1 in Business & Finance ➔ Investing
You are right that 5% of two million is $100K -- and that works out to $8,333 a month. However, since CDs compound daily, the interest on 5% is actually a little more.
CDs use what is called the Actual/360 accrual method. To find the daily rate, take the yearly rate & divide by 360 (not by 365). Then you compound this every day (usually 365 per year).
At 5%, the annual interest on two million is:
2,000,000 * (1+0.05/360)^365 - 2,000,000 = 103,995
This averages 8,666 per month.
It looks like CD rates are actually a little higher right now -- so his income would also be a few hundred dollara a month higher.
There are probably better investments that he can make. If he wants CDs because they are safe -- then he might consider municipal bonds. They pay about 4% these days. That sounds worse (giving him about $7,000 per month) -- but you have to remember that interest on Munis is tax free -- while interest on CDs is not.
Investing in the stock market would give a much higher return in the long run -- but there is also more risk.
2007-01-31 14:44:02 · answer #1 · answered by Ranto 7 · 0⤊ 0⤋
Your numbers are right. Note the following.
1. CD s are frozen money. Once you put it in, you can not take it out for emergency or better investment opportunities.
2. So I suggest to have 200,000 in liquid cash. Buy 1 M, 1 yr CD, .5 M 6 month CD, and .2 M 3 M CD
3. After about 6 months, get more knowledge about investments. You could get return of 10-20% in stock market, mutual funds etc. At that point, also talk to several financial planners
2007-01-31 14:44:55 · answer #2 · answered by kenneth h 6 · 0⤊ 0⤋
Yes that is about right, and yes it is taxable. There is a limit that is federally insured by most bank. But all you can do is open a bunch of Cd's that meet the max. You can try laddering the CD's that will give you a check a month.
2007-01-31 14:49:35 · answer #3 · answered by Grandpa Shark 7 · 1⤊ 0⤋
With 2 mil you get a special rate that's a little higher...let's say it's 6% yeild for the year ($120,000/yr or $10,000/mo). He will have to pay federal and state taxes and local maybe AND SOCIAL SECURITY TAXES on $120,000 each year...like $45,000/yr in taxes - leaving him $75,000 or $6,250/mo which he should try to not spend...he could possibly build that 2 mil into 50 mil or more if he invests it wisely.
CD's are safe.
2007-01-31 14:33:27 · answer #4 · answered by (_)iiiiD 4 · 0⤊ 0⤋
Mutual funds will probably work better. Consult an investment banker.
2007-01-31 14:35:01 · answer #5 · answered by JADE 6 · 0⤊ 3⤋