- \n
- Initial Capital \/ Principal (P<\/span>\u00a0or PV<\/span>):<\/b> The amount of money you start with.<\/li>\n
- Interest Rate (r<\/span>):<\/b> The percentage applied to the capital for each time period.<\/li>\n
- Period\/Frequency:<\/b> The unit of time in which interests are calculated or settled (daily, monthly, quarterly, annually).<\/li>\n
- Term (t<\/span>):<\/b> The total duration during which the money will be “working.”<\/li>\n
- Final Capital \/ Future Value (A<\/span>\u00a0or FV<\/span>):<\/b> The resulting value from adding the initial capital plus the generated interest.<\/li>\n<\/ul>\n
![\"bitsa_simple_interest_formula_financial_calculation\"](\"https:\/\/bitsacard.com\/blog\/wp-content\/uploads\/2021\/05\/Acuerdo-analisis-financiero.jpg\")
<\/p>\n\n
Technical Note:<\/b> It is vital that the rate (r<\/span>) and the term (t<\/span>) speak the same temporal “language.” If the term is in years, the rate must be annual. An annual nominal rate does not produce the same result as a monthly effective rate without the proper conversion.<\/p>\n<\/blockquote>\n
What is Simple Interest?<\/h2>\n
Simple interest is calculated only on the initial principal. This means that the profits generated in each period are not added to the capital to generate new interest; they remain independent. As a result, the growth of your money is linear: every month or year you receive exactly the same amount.<\/p>\n
Simple Interest Formula<\/b><\/h3>\n
To find the interest generated:<\/strong><\/p>\n
\nI = P \\cdot r \\cdot t<\/div>\n<\/div>\nTo find the accumulated final capital:<\/strong><\/p>\n
\nA = P(1 + r \\cdot t)<\/div>\n<\/div>\nQuick Example of Simple Interest<\/b><\/h3>\n
If you decide to top up Bitsa<\/a> to manage a fund of \u20ac1,000 and place it in a product offering 5% annual simple interest for 3 years:<\/p>\n
- \n
- Year 1:<\/b> Generates \u20ac50 interest.<\/li>\n
- Year 2:<\/b> Generates another \u20ac50.<\/li>\n
- Year 3:<\/b> Generates another \u20ac50.<\/li>\n
- Total:<\/b> \u20ac1,150. The interest does not vary because it is always calculated on the original \u20ac1,000.<\/li>\n<\/ul>\n
![\"bitsa_virtual-card_mobile-payments\"](\"https:\/\/bitsacard.com\/blog\/wp-content\/uploads\/2020\/12\/cards.png\")
<\/p>\nWhat is Compound Interest?<\/h2>\n
Compound interest is often described as the “snowball effect.” Unlike simple interest, here the interest generated in one period is added to the initial principal for the calculation of the next period. In other words, you earn interest on your interest.<\/p>\n
Compound Interest with Periodic Contributions<\/b><\/h3>\n
In a compound interest calculator with periodic contributions, a variable called PMT<\/b> (monthly payment) is added.<\/p>\n
Practical Example: Same money, two different results<\/b><\/h3>\n
If we take the previous example (\u20ac1,000 at 5% per year for 3 years) but with monthly compounding:<\/p>\n
At the end of the third year, the capital would be \u20ac1,161.47<\/b>. Although the difference seems small over 3 years, over 10 or 20 years, the gap between the simple and compound models becomes massive.<\/p>\n
![\"bitsa_compound_interest_formula_capitalization\"](\"https:\/\/bitsacard.com\/blog\/wp-content\/uploads\/2021\/05\/diferencias-interes-simple-compuesto.jpg\")
<\/h2>\nDifferences between Simple and Compound Interest<\/h2>\n
- Year 2:<\/b> Generates another \u20ac50.<\/li>\n
- Interest Rate (r<\/span>):<\/b> The percentage applied to the capital for each time period.<\/li>\n
![\"bitsa_compound_interest_savings_growth\"](\"https:\/\/bitsacard.com\/blog\/wp-content\/uploads\/2021\/05\/La-formula-del-interes-compuesto.jpg\")
<\/h2>\n![\"bitsa_simple_interest_example_1000_euros\"](\"https:\/\/bitsacard.com\/blog\/wp-content\/uploads\/2021\/05\/interes-compuesto-simple-dinero.jpg\")
<\/p>\n