How to calculate simple interest

Simple Interest Notes for 7th and 8th Grade Math Students

What is simple interest?

Simple interest is a way to calculate the extra money you earn or have to pay when you save or borrow money. It's based on three things:

• Principal (P): The amount of money you start with.
• Rate (R): The percentage of interest you earn or pay per year.
• Time (T): The number of years the money is saved or borrowed.

Simple interest formula

The formula to calculate simple interest is:

I = P x R x T

Where:

• P is the principal amount.
• R is the annual interest rate (in decimal form).
• T is the time the money is invested or borrowed for, in years.

How to convert a percentage to a decimal

To use the interest rate in the formula, you need to convert it from a percentage to a decimal. Here’s how you do it:

Divide the percentage by 100.
For example, 5% becomes 0.05 (5 ÷ 100).



Here are two step-by-step examples

Example 1: Saving Money

Problem: You save $200 in a bank account with a 3% annual interest rate for 2 years. How much interest will you earn?

Steps:

Identify the values:
Principal (P): $200
Rate (R): 3% or 0.03
Time (T): 2 years

Use the formula to calculate:
I = P x R x T
I = 200 x 0.03 × 2

Answer: You will earn $12 in interest.

Example 2: Borrowing Money

Problem: You borrow $500 from a friend who charges you 4% annual interest. You plan to repay it in 3 years. How much interest will you owe?

Steps:

Identify the values:
Principal (P): $500
Rate (R): 4% or 0.04
Time (T): 3 years

Use the formula to calculate:
I = P x R x T
I = 500 x 0.04 × 3

Answer: You will owe $60 in interest.

Practice problems

Try solving these on your own:

• You save $300 in a savings account with an interest rate of 2% per year for 5 years. How much interest will you earn?
• You borrow $150 from your sibling with an interest rate of 6% per year. If you repay it in 2 years, how much interest will you owe?
• You invest $2,000 in a stock that pays 7% interest per year. How much interest will you earn after 3 years?

Key points to remember

• Always convert the interest rate from a percentage to a decimal before using the formula.
• Make sure the time is in years. If it’s in months, convert it to years (e.g., 6 months = 0.5 years).
• Simple interest is easy to calculate with the formula: I = P x R x T.

By understanding these basics, you can easily calculate how much extra money you will earn or owe with simple interest!