Formula of simple interest on the deposit: examples of calculations

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The most common and easiest form of investment available to everyone today is a bank deposit. This type of investment can be classified as fairly reliable, but it should be borne in mind that, as a rule, the rates offered by banks rarely cover inflationary losses. In other words, through a deposit, one manages to save one's money, but not to increase it.

What are

Marketing departments of banks are inventing different names for these deposits. Their spectrum is extremely wide. For example, in Sberbank, in addition to the classic three “Save”, “Replenish” and “Manage”, there are various “Leaders”, “Just Seven”, “Anniversary” and many, many others. In other banks, there are deposits "Profitable", "Profitable", "Maximum Benefit" and others. It must be remembered that all these names serve only one purpose - to maximize the attraction of customers with their money. Therefore, it is clearly not worth paying special attention to them. Let's try to figure out where it is better to place funds and how to calculate interest on them using the simple interest formula forcontribution.

What to look out for

Of course, first of all, you should choose a bank. Cases of mass revocation of banking licenses have recently become so commonplace that special care is needed here. Therefore, the choice should fall on systemically important banks, or more simply, those financial institutions that are too big to "fall" without consequences for the whole country. Advertising increased, sometimes simply exorbitant interest should scare away, and not attract potential customers. The lessons of MMM, "Lords", "Gorny Altai" and others have taught our citizens little. The amount of the deposit up to a certain amount is, as it were, insured by the state, but if you imagine what circles of hell you need to go through in order to get your money that disappeared in a bankrupt bank, you inevitably come to the conclusion that there is an excessive risk.

Main Features

Any deposit, or deposit, in a financial institution can be characterized by four main features:

1. Interest rate.
2. Interest payment method (at maturity or periodically).
3. Terms of early withdrawal of all or part of the amount.
4. Possibility to recharge before the expiration date.

Everything else is the so-called "pipes and whistles", invented, like the names of deposits, to draw attention to the banking product. Nevertheless, these nuances are also worth familiarizing yourself with in order to eliminate hidden costs. For example, additional deposit insurance, variouscommissions, withdrawal fees and other tricks. Recently, they are almost not used, but vigilance should not be lost. And in all cases, you need to remember that any bank, any financial institution will not work at a loss for the sake of the client. If, as a rule, no questions arise with the 3rd and 4th points, consider the formula for calculating simple interest on a deposit.

Simple interest

As the name implies, the formula for calculating simple interest on a deposit is very simple. It looks like this:

P=(Contribution / 100) × Bet × G

where:

• P - the sum of simple interest on the deposit for one year;
• deposit - the amount placed on the account;
• rate - interest rate in percent per annum;
• y – period of placement of funds in years.

Here we are talking about paying interest at the end of the term. For a whole number of years, when Г=1 or 2, and so on, the amount of income according to the formula for calculating simple interest on a deposit is calculated elementarily.

If the term of placement of finance is several months or days, the following calculations must be added to the above formula:

• Calculate the value of P, that is, the theoretical amount of interest that will be accrued on the deposit for the year.
• Then the result should be divided by 12 (the number of months in a year) and multiplied by the number of months of contribution. For example, 500,000 rubles are placed at 6.2% per annum for a period of 7 months. The calculations will look like this:

500000 / 100=5000; 5000 × 6, 2=31000 (this is the sum of interest for the full year).

And in 7 months it turns out: 31,000 / 12 × 7=18083, 33

Thus, at the end of the deposit term, the account will have:

500000 + 18.083, 33=518.083, 33

If we are talking about days, then the annual amount of interest should not be divided by 12, but by 365 or 366 (the number of days in a particular year) and multiplied by the number of days during which the deposit will be in a financial institution.

For example, the already mentioned amount is placed not for 7 months, as in the previous example, but for 22 days. Then the value of the annual interest, 31,000, is divided by 365 to give a result of 84.93, which expresses the sum of the interest for one day, and after that it is multiplied by the number of deposit days: 84.93 × 22=1868, 46

At the end of the deposit period, that is, after 22 days, the amount will be: 500000 + 1868, 45=501868, 45.

Having de alt with a simple calculation, you can proceed to the formula for calculating simple and compound interest on a deposit.

Compound interest

Despite the name, there is nothing particularly complicated here either, although the formulas for simple and compound interest on a deposit differ. In the second case, she looks a little intimidating:

P=Contribution × (Stake / 100 / N) ^ N

Where N is the number of interest periods.

If I try to put it in a simpler way, then such a calculation differs from the simple interest formula on a deposit by the number of accruals. If in a simple deposit interest is accrued once, at the end of the term, then in a complexthey can be counted once a month, once a quarter, once every six months, and all this - within the time limit. At the same time, if the accrued interest is added to the principal amount on the account, then this will be the so-called capitalization deposit, and if, at the request of the owner, they are transferred to another account, for example, to a card, then this will be the usual placement of funds, to which the formula can be applied simple interest on the deposit, but counting them not for the entire period of the deposit, but only for the accrual period.

Deposit with capitalization

Today, this is perhaps the most common type of deposit. Its essence is that at the end of each accrual period, and this is usually one month, interest is accrued on the principal amount for that same month and added to it. In the next month, the calculation of new interest is no longer based on the initial deposit amount, but on the amount increased by the amount of interest for the previous month. In other words, here the formula for simple interest on the deposit is applied every month, but each time it is calculated from the principal amount increased by interest for the previous month. Let's take a well-known example with the same parameters, but now consider the placement of funds with monthly capitalization and calculate using the simple interest formula on the deposit, but monthly:

Amount of interest for the first month. 500000 / 100 × 6, 2 / 12=2583, 33. This amount of interest is added to the main deposit: 500000 + 2583, 33=502583, 33

Interest for the second month is calculated from the increased principalsums 502583, 33 / 100 × 6, 2 / 12=2596, 69. And again this amount is added to the main deposit: 502583, 33 + 2596, 69=505180, 02.

And so on.

In principle, the already given formula for simple interest on a deposit with capitalization can be applied immediately, without using exponentiation. The result will be the same, just the calculations may take longer.

What's the difference

Compare the results of calculations using the simple interest formula on a deposit and the compound interest formula on a deposit with a monthly capitalization from the above example for a period of one year.

Simple interest: 500000 / 1006, 2=31000; 500000 + 31000=531000. Compound interest with monthly accrual, that is, there are 12 accrual periods:

6, 2 / 100 / 12=0, 0051666 + 1=1, 0051666 (raised to the power of 12)=1, 06333

1, 06333 × 500.000=531665.

In one year the difference was 665 rubles.

The magic of compound interest

In the previous example, the difference between interest calculated using simple and compound interest formulas is not very impressive. However, over long periods of time, it is more than just impressive. There are many stories, starting with the biblical ones, about what small deposits placed at compound interest on the long horizon could turn into. A small investment in a couple of hundred years, thanks to this magic, turns into billions.