Calculate Interest so You Always Know Where You Stand Financially!

It’s important to know how much interest you get on your investments or how much extra you have to pay on your loans. To do that, you should know how to calculate interest, which you can learn by reading through the article below.

Simple Interest

Know Your Principal

First thing you have to consider is your principal; this is the total amount that will be drawing the interest. For instance, let’s say your principal is $1000. This is the amount you will be calculating your interest on.

Decide the Interest

After you have decided your principal amount, you need to decide the interest you want to calculate. This can either be simple interest or compound interest. Simple interest is a charge that is applied once, whereas compound interest builds on itself. The compounding can be daily, monthly or yearly.

Calculate Simple Interest

Once you have decided your principal and the interest, you can go ahead and calculate it. To do that, take your interest rate and divide it by 100. Whatever decimal point you get, multiply it with your principal to calculate interest. For instance if your interest is 5% and your principal is $1000, you will get 0.5 after dividing by 100 and multiply that with 1000, which will give you $50 as your interest.

Calculate Compound Interest

Calculating the compound interest isn’t as easy as calculating the simple interest. Let’s suppose that your 5% interest is compounded annually, and instead of a debt, it’s for an investment. So, the first year you will earn a 5% on $1000 making your total amount $1050. The year after that you will get a 5% interest on $1050, making your interest amount $52.5 and your final amount $1102.5.

Use a Formula

Instead of calculating manually each time, you can simply add a 1 to the decimal point figure of your interest and multiply that with your principal amount each time you have to compound your interest. So your interest would be 1.05 and you will multiply that with $1000 for the first year and $1102.5 the year after that, and so on.

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