Simple Interest Bi-Weekly Mortgage

Other than giving us discounts at Ross, what are percents good for?

Well, we don't always have to spend money to save it. Instead, we can make an investment or tuck it away into a savings account. Banks and investors actually pay us to do this by offering interest rates, usually given as—you guessed it—percents.

The amount of interest we earn, I, depends on four factors:

- the principal, P
- the interest rate, r
- the time, t
- how often the interest is compounded

The principal is the original amount of money you put into the loot. Whether you deposit $30 into a savings account or invest $500,000 in your cousin's startup company, that's the principal. Just to be clear, we aren't talking about your principal, Mrs. Lipschitz.

The interest rate is the percent of the principal that you earn. The higher the interest rate, the more money you'll earn. (Note: this is the opposite when taking out loans. Loans with high interest rates mean you'll have to pay more money back. It's a good lesson in context.)

The time we're talking about is the amount of time you let your investment simmer. The more time you leave your savings alone, the more you'll have saved up. (On the flip-side, the longer you leave your debts and loans unpaid, the more you'll owe in the long run.)

Compounding interest means adding the money you've earned from interest to the principal amount. It's a good thing for savings (but a bad thing for loans) because the interest rate will be applied to a larger balance. Basically, it means you'll earn (or owe) more money...faster.

We won't get into compound interest here, because that can get real complicated real fast. Instead, we'll talk about simple interest, or the amount of interest you can earn from the principal alone. That's right, Mrs. Lipschitz. Put down those knitting needles and pay up.

We can use a simple formula to calculate I: the interest you earn. If we know the principal P, the interest rate r, and the time t, all we have to do is multiply these three values together. As a formula, it looks like this:

I = Prt

When plugging values into the equation, it's a good idea to check for a few things. Our interest rate r should be in decimal form. Since percents are out of 100, it's easy to convert them into decimals. The interest rate and time need to have the same units. If you get 4% interest every month, you'll want to multiply that by the principal and the number of months you've had your investment, even if it's been 30 years.

Don't stress about calculating simple interest. After all, there's a reason it's called simple interest. And despite how much interest you earn on your principal, it's bound to be more interesting than your principal. Come on, Mrs. Lipschitz...look alive.

Mrs. Lipschitz?