How to Calculate Interest

How to Calculate Interest
Everyone should learn to calculate interest.

Know what the entire amount drawing interest is. This is the principal. For this example, let's say the principal is $10,000.

Decide if you want to calculate simple interest or compound interest. Simple interest is a one-time charge. Compound interest builds on itself from one period to the next. It could be compounded yearly, monthly or even daily.

To calculate simple interest, take the interest rate and divide by 100. If your interest rate is 7 percent, this would turn it into .07. Now multiply that decimal by the amount of the principal (which is $10,000 in our example) to get the interest. In this case, it would be $700.

Calculating compound interest is more complicated. Suppose your 7 percent interest is compounded every year, and it is for an investment, not a debt. That means $10,000 turns into $10,700 after one year. The following year you would earn interest of .07 multiplied by $10,700, which equals $749. Now the total comes to $11,449.

If you need to calculate compound interest over more than just a few periods of time, it is easier to use a formula instead of repeating a calculation over and over. To do this, first add a 1 to your interest rate decimal. Therefore a 7 percent rate would become 1.07.

Then convert this number to the power of your number of times the interest is compounded. If it is once a year for 12 years, then it would be 1.07 to the 12th power, which equals 2.25. That means your money will have grown 2.25 times at the end of 12 years.