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Understanding Interest: Simple vs. Compound Concepts & Examples

Learn the fundamentals of interest, simple interest calculations, and compound interest growth with clear examples. Discover how interest works through engaging videos and real-world scenarios to improve your financial literacy.

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Understanding Interest: Simple vs. Compound Concepts & Examples

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  1. Interest…How does it all work? • Interest: fee paid by a borrower of assets (bank) to the owner as a form of compensation for the use of the assets (money). • It is most commonly the price paid for the use of borrowed money, or money earned by what people deposit (put in) in a bank

  2. Simple Interest • http://www.youtube.com/watch?v=6AZijeJDmgY • Simple Interest: The amount of interest can be calculated by using the formula: I= Prt • I=Interest • P=principal (original amount of money/amount invested) • R=rate (%) (HINT: when you put it in the formula you need to change it to a decimal) • T=time (how long)

  3. I=Prt Sample Problem… What is your interest if your: The amount of money you put in was 125.00 Your Interest rate was 8.5% You put it in for 7 years I = Prt I= 125.00 (.085) (7) I = $74.38

  4. Compound Interest • http://www.youtube.com/watch?v=DB-qoEkQGOo • Compound interest • Paid on the original principal ANDon the accumulated past interest • You can use the same formula as simple, you will just use it how ever many years it gives you.

  5. Compound Interest I = Prt I= 125.00 (.085) (1) I = $ 10.63 So at the end of year one you would have 125.00 + 10.63 = 135.63 I = Prt I= 135.63 (.085) (1) I = $ 11.53 So the amount after 2 years would be 135.63 + 11.53 = 147.16 Sample Problem… What is your total amount of money in your account if: -The amount of money you put in was 125.00 -Your Interest rate was 8.5% -You put it in for 2 years and it’s compounded annually

  6. Teenage (and Mrs. Etter) ScenarioThe Problem: You want to save to get an Iphone5s. Your parents tell you to use your own money-OH MAN! Problem is they cost $499.00 and you have only $100.00 in your piggy bank.The Thought: You remember your wonderful social studies teacher telling you about interest the bank will pay you for putting money into their institution. Action Steps: So you head off to the local new cool bank called Ettigulis Banking! You put your money into a new account. Rates: The bank is so stinking nice (unlike McNiece Banking that only gives .3% interest rate) and they give you an interest rate of 10%.The Question: How many years will it take you to reach your goal of $499.00? SIMPLE VS. COMPOUND

  7. Comparing Compound and Simple You invested 100.00 in 2 different accounts. One that gets simple interest and one that gets compound interest. In 50 years…look at the difference.

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