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FINANCE GUIDE: SIMPLE INTEREST

This guide will cover important topics like simple interest, compound interest, consumer price index (CPI), and the tax system in America. Gaining an understanding in these topics can help you manage your finances more efficiently.

INTRODUCTION

In a world full of finances, any person can benefit from learning what interest is, how it applies in certain backgrounds, and how to calculate it. For example, taking out a loan to cover expenses could produce a lot or a little interest depending on the interest rate and how the person calculates the amount. Understanding simple interest vs. compound interest could save you money or earn you more money.

WHAT IS SIMPLE INTEREST?

Simple Interest is the interest earned on a principal amount over a time period. In other words, you invest or borrow money and you earn or owe money on that amount.

The interest is not added to the starting amount and reinvested, which is what compound interest is.

SIMPLE INTEREST AS A FORMULA

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TWO SCENARIOS

Here are two scenarios that can apply to simple interest:

  1. You can earn interest on money you borrowed. For example, on a student loan. This amount will need to be paid back.
  2. You can earn interest on money you invest. This amount is given to you when you get your principal amount back.

HOW DO WE CALCULATE SIMPLE INTEREST?

Notice two important aspects:

  1. The rate is in decimal form; not percent form and
  2. The time is in years; not days, months, weeks, etc.

Here is a video with examples. 

 

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