Calculating Simple Interest: From Initial Deposit to Final Amount

Understanding simple interest calculations is crucial for anyone managing their financial resources. This article will guide you through the process of calculating the future value of a principal amount over a specific period, using a practical example involving Initial Angel's PHP 20,000 deposit at a 0.5 percent annual interest rate.

Simple Interest Basics

To calculate the total amount of money after a specified period, you can use the formula for simple interest. The formula is as follows:

A P I

Where:

A Total amount after interest P Principal amount (initial deposit) I Interest earned

The interest earned (I) can be calculated using the formula:

I P × r × t

Where:

r Interest rate as a decimal t Time in years

Step-by-Step Calculation

Given the details of Initial Angel's deposit:

P 20,000 PHP r 0.5 or 0.005 as a decimal t 6 years

Let's break down the calculation:

1. Calculate the Interest Earned

The formula for calculating the interest earned is:

I 20,000 × 0.005 × 6

Step 1: Multiply the principal by the interest rate: 20,000 × 0.005 100 PHP

Step 2: Multiply the result by the time period: 100 × 6 600 PHP

Thus, the interest earned over 6 years is:

I 600 PHP

2. Calculate the Total Amount

To find the total amount, add the interest earned to the principal amount:

A P I

A 20,000 600

A 20,600 PHP

Therefore, after 6 years, Initial Angel's money will be:

A 20,600 PHP

Understanding the Calculation

In simple interest, only the principal earns interest. The interest collected in one year is added to the original principal to determine the total amount over the period. The interest rate, expressed as a percentage, is converted to a decimal for the calculation.

For example, a 0.5 percent interest rate is expressed as 0.005 in decimal form. To find the interest earned in a year:

.005 × 20,000 PHP 100 PHP

Thus, over 6 years, the total interest earned would be:

100 PHP × 6 600 PHP

Adding this to the initial principal gives us the final amount.

For those interested in further calculations, the future value can be found using the formula:

Future Amount Principal (Principal × Interest Rate × Period)

In this example, the formula would be:

Future Amount 20,000 (20,000 × 0.5 × 6) 20,600 PHP

Conclusion

Mastery of simple interest calculations can significantly benefit financial planning and investment strategies. By understanding the formula and the underlying principles, you can make informed decisions about your money. Whether you are planning your savings or analyzing investment opportunities, simple interest calculations remain a vital tool.

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