Personal Finance / Unit 4: Saving and Investing
4.1 Simple Interest
Notes
Interest is the cost of using money, or the reward for lending it. Simple interest is paid only on the original amount.
- Formula: $I = Prt$, where $P$ is the principal (starting amount), $r$ is the yearly rate as a decimal, and $t$ is time in years.
- Total amount $= P + I$.
- Example: $1,000 at 5% for 3 years. $I = 1000 \times 0.05 \times 3 = 150$, so $150. Total $1,150.
- Simple interest grows by the same amount each year.
- Convert percent to a decimal by dividing by 100: 4% is 0.04.
Practice
Which formula gives simple interest?
Simple interest is principal times rate times time.
How much simple interest does $2,000 earn at 4% per year for 2 years?
$2000 \times 0.04 \times 2 = 160$.
A $500 loan charges 6% simple interest per year. What total will be repaid after 3 years?
Interest is $500 \times 0.06 \times 3 = 90$. Total $= 500 + 90 = 590$.
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