Calculating Simple Interest

Every person is affected by interest, places were you will most likely see interest in action are mortgages, Personal loans, savings accounts and credit cards. When you lend money to a bank or institution through savings accounts or borrow money from the bank through loans, interest is typically the amount that is paid for borrowing the money. If you loan the money to the bank than you receive interest, if you borrow money from the bank you pay the interest. I like to picture interest as a rental payment for your money, the bank “rents” your money from you and pays you the interest on regular basis, usually monthly or yearly.

The two main types of interest are simple interest and compounding interest, this article focuses on simple interest. Simple interest is usually seen on savings accounts such as term deposits. As online savings accounts are becoming more popular and investors are demanding more for their money, compounding interest is becoming more popular.

When calculating simple interest you need three pieces of information; the interest rate, how much you want to invest and the amount of time you want to invest for. The Formula for calculating simple interest is i=prt.

 i=Interest that you will earn

p= is the principle amount or the amount you have leant

t=time how long the money is invested for

 An example of the above equation is show in the scenario below:

Kat has $1,000 that she would like to invest in a term deposit which is paying 6.5% p.a, Kat's is interested in investing for 1 year and the interest is calculated as simple interest.

 i=prt

i=$1,000 X 6.5% X 1

i=$64

Kat would earn $64 in interest for investing her money with the bank in a term deposit. To find out the total amount the bank will pay back to Kat you can adjust and improve the formula to incorporate the principle amount: 

Return = prt+p

Return = $1,000 X 6.5% X 1 + $1,000

Return = $1,064

At the conclusion of the term deposit Kat would receive $1,064

Calculating simple interest is exactly as it sounds simple. Simply follow the above formula and you can work out the return from any investment which uses simple interest. Calculating compounding interest is much harder than the simple interest formula; most people use the aid of a financial calculator or a spread sheet on their computer.