Calculating Principal in Money Matters



Calculating Principal in Money Matters

What is principal when we are talking about money?

The principal is the amount of money that is borrowed or saved.

If you put $2500.00 in a savings account, that is the principal amount of money. It is the amount of money that you start with.

What other terms do we need to know when working with money?

Interest

The first term that we need to be familiar with is interest. When we have saved money or borrowed money, often there is a question of interest earned or interest that needs to be paid.

When working with interest, we need to keep in mind that the rate and the time determine the interest. Let’s look at rate.

Rate

The rate is the percentage that a bank pays for money in a savings account. It is also the percentage that a credit card company or loan company charges for borrowing money. Rates are often done annually, but sometimes they are calculated monthly as in the case of credit card debt.

Time

Time relates to the time that the money is saved or borrowed for. It is the amount of time that the money is in use.

We can use a formula to calculate money matters.

Here is the formula that we can use when calculating interest, principal, rate or time.

I = prt

Interest = principal x annual rate x time

Let’s look at an example.

Example

If Maria saves $345.00 at an annual percentage rate of 4%, how long will it take her to earn $55.20 in interest?

We are looking for time in this problem, but we can use the same formula. Fill in all of the information that you know and then solve for the unknown quantity.

55.20 = (345)(.04)t

55.20 = 13.80t

55.20 13.80 t ’

4 = t

Our answer is 4 years.

Now let’s take a look at figuring out the rate.

Example

If Scott borrows $500.00 for two years and owes $30.00 interest at the end of it, what is the rate that he borrowed the money at?

Here we are looking for the percentage. We use the same formula and fill in all of the given information.

I = prt

30 = (500)(2)r

30 = 1000r

30 1000 r ’

.03 = 3%

Calculating Principal Worksheet

Directions: Use the formula and the given information to calculate the missing value.

1. Jesse put $5180 in his savings account at an annual interest rate of 5%, how much interest will he earn at the end of three years?

2. Joanne borrowed $360.00 from her brother. He is going to charge her 2% interest monthly. How much will she owe him after two months?

3. If Kara saves $800.00 annually, at a 3% rate, how long will it take her to earn $48.00?

4. If Rex has a credit card balance of $1400.00. With a 5% annual interest rate, how much will he owe after 3 years?

5. Susan has borrowed $25,000 for college. If she has an annual interest rate of 6%, how much interest will she pay per year?

6. If it takes her 10 years to pay back the loan, at this rate, how much interest will she pay by the time she pays back the loan?

7. If you add these two amounts together, what was the “real” loan that Susan made?

8. Tommy put $1600 in his savings account. If he earns $96.00 in two years, what is his annual interest rate?

9. If Julie saves $2500 for two years and earns $500.00 in interest, what is her annual percentage rate?

10. If a credit card company offers you an annual interest rate of 16% versus a rate of 22%, which is the better rate?

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