Simple interest is a type of interest that is calculated on the principal amount of a loan or investment, without taking into account any interest that has accumulated over time. It is calculated as a fixed percentage of the principal amount.
The formula for calculating simple interest is:
I = P * r * t
- I is the interest earned or paid
- P is the principal amount (the original amount borrowed or invested)
- r is the interest rate, expressed as a decimal
- t is the time period, in years
For example, let’s say you invest $10,000 in a savings account with an annual interest rate of 3%. The interest earned in the first year would be:
I = $10,000 * 0.03 * 1 = $300
If you leave the money in the account for a second year, the interest earned in the second year would also be $300, because simple interest does not take into account any interest earned in previous years. Therefore, after two years, your total balance would be:
$10,000 + $300 + $300 = $10,600
Note that simple interest is different from compound interest, which takes into account the interest that has accumulated over time and adds it to the principal amount for the next calculation of interest.