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?
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Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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