Making Your Savings Decisions

Two Types of Interest

There are two types of interest:

Simple Interest

The formula for simple interest is:

Principal ×  r ×  N years

In the video, both people save $1,000 for 30 years, but John chose a simple interest.

In this example, the principal is $1,000, the interest rate (r) is 10 percent, and the number of years (N) is 30.

How much did John save after 30 years?

$1,000 ×  10%  ×  30 =  $3,000

Compound Interest

The formula for compound interest is:

Principal ×  [(1+r)^N years −  1]

An interest rate (r) is typically noted annually, known as the annual percentage rate (APR).

In the video, both people save $1,000 for 30 years, but Lisa chose a compound interest.

In this example, the principal is $1,000, the interest rate (r) is 10 percent, and the number of years (N) is 30.

How much did Lisa save after 30 years?

$1,000 × [(1+10%)^30−1] = $16,449.4

Time to Practice: Simple and Compound Interest

Think about the answers to the questions below. When you think you have the answer, type it in.

Hint: Use the Compound Interest Calculator to help you with the calculations.

Step 1: Matching Interest Equation Parts

Suppose you want to know how much interest you will earn in five years if you invest $3,000 now with an annual interest rate of four percent. Match the number to its term.

Step 2: Solving for Simple and Compound Interest