Can you figure interest without computer or calculator?

[kyle johnson]

If I were to borrow $500. at 8% for 15 months How would you figure this without any computer or calculator? I've always wanted to know how to do this.

If I were to invest $1000. for 40 months at 5% How much interest money would I have made at the end of 40 months? Please show me.

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kyle


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[slumlordfrank]

I'm going to try to give a short answer, which is difficult for me and difficult for this subject.

IIRC from finance classes in college there are about 50 different ways to calculate interest (which is very beneficial if you're the LENDEER), but let's try to make this EASY. Let's say you're borrowing or lending to a "close" family member.

P(rinciple) $500
R(ate) .08 (8%)
T(ime) 1 1/4 (1/4 year is 3 months, so 15 months = 1 1/4

I(interest) = P X R X T

I =PRT

500 X .08 X 1.25

500 X .08 =40

40 X 1.25 = 50 is your short, simple answer. This is what's known as SIMPLE INTEREST, which is something you'll almost never encounter in the "real world".

HOWEVER, if you went to a USED CAR DEALER, or a FINANCE COMPANY you would find yourself paying MUCH MORE than $50 for this simple transaction. I'm not knocking either of those businesses, just pointing out the facts.

Good luck and I hope this helped.

Frank

[kyle johnson]

What about question #2 Frank? Can you also figure compound interest and explain?
Kyle

[joed]

here is a math tutorial on interest calculation

http://mathforum.org/dr.math/faq/faq.interest.html

[kyle johnson]

Thank you. That really helped a lot.
Kyle

[turbogeek]

There is also a quick-and-dirty long-term investing rule you can use. Accounting-type-folks call it "The Rule of 72". Essentially it is 'the amount of time to double your investment' including compounding and it works like this:

Divide 72 by the effective annual interest rate. That is the number of years it will take to double your investment.

EXAMPLES:
$1,000 invested at 6%. 72/6 = 12. It will take 12 years to have $2,000. (At 12 years 6% annual return you would actually have $2,012.20)

$1,000 invested at 13%. 72/13 is a little less than 6. It will take about 5 1/2 years to have $2,000. (At 5 1/2 years, 13% return you would actually have $1,958.54)

Not really your initial question, but a nifty thing to put in your head.

[Minxster]

Thank you, you also helped me understand it so much better.

[ray2047]

There are also books for determining compound interest. Basically just find the right page correct column and follow down to the correct line.