Consumer Mathematics: Financial Management
How to Work out simple interest
Use this to find the interest earned or the total amount when interest is simple.
Before you start
- Changing a percentage to a decimal
- Multiplying decimals
- Turning months into years as a fraction
- Adding money to find a total
When to use it
Use this to find the interest earned or the total amount when interest is simple.
The steps
- Identify the principal (P), the rate (r) and the time (t).
- Put the rate in as a decimal.
- Use interest = P × r × t.
- Add the interest to the principal for the total amount, if asked.
- Keep the time units matching the rate (years with a yearly rate).
Worked example
RM3000 is invested at a simple interest rate of 5% per year for 4 years. Find the interest earned and the total amount.
- Identify the values: P = RM3000, r = 5% per year, t = 4 years.
- Put the rate in as a decimal: r = 0.05.
- Use interest = P × r × t = 3000 × 0.05 × 4 = RM600.
- Add the interest to the principal for the total amount: 3000 + 600 = RM3600.
- The time is in years and the rate is per year, so the units match.
A second example, with a twist
The time is given in months, so it must be changed to years (8/12) before multiplying, because the rate is per year. RM2400 is invested at a simple interest rate of 6% per year for 8 months.
Find the interest earned and the total amount.
- Identify the values: P = RM2400, r = 6% per year, t = 8 months.
- Put the rate in as a decimal: r = 0.06.
- Make the time match the yearly rate: t = 8 months = 8/12 year = ⅔ year.
- Use interest = P × r × t = 2400 × 0.06 × 8/12 = 144 × ⅔ = RM96.
- Add the interest to the principal for the total amount: 2400 + 96 = RM2496.
Formulae you may need
Formula pages
Practise this in a KBAT problem
Frequently asked questions
What do I do when the time is in months?
Change the months into years by dividing by 12, because the rate is a yearly rate. For example, 8 months is 8/12 of a year.
If you leave the time as 8, the interest comes out twelve times too big.
Does simple interest change from year to year?
No. Simple interest is always worked out on the original principal, so you earn the same amount every year.
This is different from compound interest, where the interest is added back and the amount grows each period.
The question only asks for the interest, do I add the principal?
Only add the principal if the question asks for the total amount or the final value. If it just asks for the interest earned, stop after P × r × t.
Read the question carefully to see which one it wants.