Pre Algebra (Period 2 & 4)

Simple & Compound Interest 7-8

Let's talk about different types of interest: credit cards, car loans, mortgages


None of them charge us simple interest, but you need to understand this first:



I = PRT
 (mneumonic devices "PRINT" or "PARTY")

I = Interest

P = Principal ($ deposited in savings or $ owed to credit card or bank)

R = % (Change it to a decimal or fraction before multiplying)

T = Time (based on one year so if you have 9 months, put it over 12 months or 9/12 of a year)



Once you compute the interest, you'll need to ADD it to your cost.


In that way, it is LIKE TAX AND TIP.

You'll move it, move it, multiply, then add.



BUT WHAT IS DIFFERENT ABOUT INTEREST?


The TIME element!


WHY IS THAT NEEDED IN THIS FORMULA?

Because you may pay it back over different amounts of time.

Obviously, the sooner you pay it back, the less interest you should owe VISA.



WHY WASN'T THERE A TIME ELEMENT IN TAX AND TIP?

Because you pay tax and tip right then...not over time!


LET'S LOOK AT BUYING THE SAME IPhone, CHARGING IT, AND PAYING IT BACK OVER 4 DIFFERENT PERIODS OF TIME:

1 year, 2 years, 10 years, and 2 months



EXAMPLE 1:

You buy an Iphone for $300 on your parent's VISA at 20% and pay it back in 1 year

I = PRT

I = ($300)(.20)(1) = $60 Interest

$300 Ipod + $60 interest to VISA = $360 total cost



EXAMPLE 2:

You buy an Iphone for $300 on your parent's VISA at 20% and pay it back in 2 years

I = PRT

I = ($300)(.20)(2) = $120 Interest

$300 Iphone + $120 interest to VISA = $420 total cost



EXAMPLE 3:

You buy the same Iphone for $300 on your parent's VISA at 20% 
but you pay it back in 10 years!

I = PRT

I = ($300)(.20)(10) = $600 Interest

$300 Iphone + $600 interest to VISA = $900 total cost



EXAMPLE 4:
 
You buy the same Iphone for $300 on your parent's VISA at 20% 
but you pay it back in 10 months!
Since the interest formula is based on YEARS, you'll need to put the
 MONTHS OVER 12 (there are 12 months in a year!)


I = PRT

I = ($300)(.20)(2/12) = $10 Interest

$300 Iphone + $10 interest to VISA = $310 total cost



SO FOR THE SAME IPHONE, YOU'VE SPENT A LOW OF $310 TO A HIGH OF $900!!

SO BEWARE OF BUYING THINGS ON CREDIT CARDS IF YOU CAN'T PAY THEM BACK FOR A VERY LONG TIME!!!!



INTEREST INCOME:

Interest that you receive on your money in the bank

Interest is computed the same way whether it is interest YOU PAY (credit cards)
or

interest the BANK PAYS you (savings accounts)



EXAMPLE:

You deposit $200 in your savings account at Wells Fargo for 9 months at 2%

I = PRT

I = ($200)(.02)(9/12) = $3 interest

$200 deposit + $3 = $203 in your savings account after 9 months