Compound & Simple Interest

June 30, 2024•2 min read

Explaining simple and compound interest

In the run up to exams simple and compound interest is something on the list that a couple have asked about, so I thought I’d do a quick recap now.

There are 2 forms:

Simple interest:

Clara invests £300 for 4 years in an account where she will earn 5% simple interest. How much will be in her account at the end of the 4 years?

£300 = 100% of the value

(divide by 100 to find 1%)

£3 = 1%

(multiply £3 by 5 to work out what 5% is)

£15 = 5%

With simple interest, each year they will give her another £15. If she keeps the money in the account for 4 years, they will give her 4x £15 (£60).

If we add this on to her initial investment of £300, we can work out the amount that is in her account at the end of the 4 years:

£300+£60 = £360

The other interest type is Compound interest.

This time the amount of interest is calculated as a percentage of the money that is in the account.

So, if J invests £300 for 4 years in an account where he will earn 5% compound interest. How much will be in his account at the end of the 4 years?

This style just has one basic formula to learn:

£300 x 1. 05^4

We start with the £300 this is the initial investment.

We then multiply by 1: because it is an investment, he will get the initial investment back as well as the additional interest.

The 1 signifies the whole initial investment.

The .05 is the percentage rate.

It is .05 because we are multiplying by just 5% rather than 50%. (If it was 2.5% we would multiply by 1.025)

Finally, the power of 4 represents the 4 years that he will be investing the money for.

If we type this into the calculator we should get the answer: £364.65

So, in this instance J receives a slightly better return on investment than Clara.

That really was a simplified version of interest, but I hope it made sense.

Simple and compound interest explained: Clara James Tutoring

Dawn Strachan

For the past 20+ years I have been a firm believer that learning should be an enjoyable experience. I appreciate that traditionally education has revolved around worksheets, textbooks, listening to teachers. But a grounding in early years and working with children who had a variety of learning styles from I learned that it is an individual activity that is personal to all of us. We don’t all learn in the same way. Our influences, our experiences, our capabilities all influence how we retain information. But through it all, I believe that if we can make it enjoyable and engaging, they will want to participate. With participation comes practice which in turn boosts skill and confidence. With an increase in skill and confidence comes a willingness to have a go. This in turn leads to more practice which leads to a positive spiral of success. The moral, we need to make learning fun, engaging, use a range of techniques.

Back to Blog