# How to Calculate Interest

Two Methods:Calculating One-Time InterestCalculating Compound Interest

There are many reason you may need to calculate interest. Below you will learn how to calculate both one-time interest and compounded interest.

## Steps

### Method 1 Calculating One-Time Interest

- 1
**Determine the principal (P).**First you need to identify how much money you are starting with. This is your principal, or P variable.- For example, if you have make a loan to a friend of $2,000, the principal loaned would be $2,000.

- 2
**Determine the interest rate (r).**Before you can calculate how much your principal will appreciate, you need to know by what rate your principal will grow. This is your interest rate and will be your r variable.- For example, if you loaned that money to a friend under the understanding that at the end of 6 months your friend would pay you back the $2,000 plus 1.5%. The one-time interest rate is 1.5%. But before you can use the rate of 1.5% you must convert it to a decimal. To change percent to a decimal divide by 100, 1.5% ÷ 100 = 0.015. Your r variable is now 0.015.

- 3
**Calculate one-time interest.**To calculate one-time interest simply multiply the principal by the interest rate, interest = P x r.- For example, if you plug in the variables determined above (P=2,000 and r=0.015), you would get 2,000 x 0.015 = 30. You now know that you can expect $2,000 + $30 in interest when your friend pays you back.

### Method 2 Calculating Compound Interest

- 1
**Determine the principal (P).**First you need to identify how much money you are starting with. This is your principal, or P variable. To calculate a rough estimate of earned interest, you could multiply the principal by the interest rate, as demonstrated in section "How to Calculate One-Time Interest." However, this does not take into account instances where the principal will increase over time as interest is added or compounded. To calculate compound interest on your principal follow the steps below.- For example, if you started a savings account by depositing $2,000 your principal would be $2,000.

- 2
**Determine the interest rate (r).**Before you can calculate how much you will earn, you need to know by what rate your principal will grow. The interest rate will be your r variable. Note that your r variable needs to be in the form of a decimal, not percentage.- For example, if the savings account you opened has an interest rate of 1.5%, this is the rate by which your principal will grow. But before you can use this interest rate of 1.5% to calculate earned interest, you must convert it from a percentage to a decimal. To change percent to a decimal divide by 100, 1.5% ÷ 100 = 0.015. Your r variable is now 0.015.

- 3
**Determine the payment schedule (n).**You need to know how often the interest will be calculated and paid. As this interest will be added to your principal and affect future interest payments. The payment schedule will be your n variable.- For example, if your savings account compounds quarterly, then that means four times a year (every three months) interest is calculated and added to the initial principal. Therefore, if the interest is compounded quarterly, n=4.
- Alternatively interest could be calculated daily, in which case n=365; or monthly, in which case n=12.

- 4
**Decide how many years you want to calculate.**Decide how many years out you want to know your interest earned. This will be your t variable.- For example, if you wanted to know how much interest you will earn in 10 years, then use 10 as your t variable.

- 5
**Plug the variables into the compound interest formula.**The formula for calculating compound interest is: P(1+r/n)^{nt}^{[1]}. The compound interest formula will determine the total amount of money in your account (earned interest plus initial principal).- For example, if you plugged in the variables discussed above (P=2,000; r=0.015; n=4; t=10) into the compound interest formula it would look like this 2000(1+.015/4)
^{4x10}.

- For example, if you plugged in the variables discussed above (P=2,000; r=0.015; n=4; t=10) into the compound interest formula it would look like this 2000(1+.015/4)
- 6
**Calculate the total amount of money in your account.**When solving, mind your order of operations. First solve within the parentheses, then the exponents, last multiply by the principal.- For example, if you were to calculate 2000(1+.015/4)
^{4x10}you would get $2323.01. You now know that if you invest $2,000 in an account that earns 1.5% interest, compounded quarterly, you would have in total (interest plus principal) $2323.01 in that account at the end of ten years.

- For example, if you were to calculate 2000(1+.015/4)
- 7
**Calculate just the compound interest earned.**If you wanted to know how much of that $2323.01 is your earned interest, complete the following. Subtract your original principal from the number calculated in step "Calculate the total amount of money in your account."- For example, $2323.01 minus the original principal of $2,000 = $323.01. You now know that if you invest $2,000 in an account that earns 1.5% interest, compounded quarterly, you would have earned $323.01 at the end of ten years.

## Sources and Citations

## Article Info

Categories: Economics