Simple Interest Principle

Computations for principal are applied for planning purposes. This is more of a futuristic point of view. If someone expects to earn a certain amount from investment or to pay for a loan or debt, thinking of what amount to invest or borrow will give the investor or borrower the idea to start in order to achieve the amount expected to earn or pay.

Remember that the interest is the product of the principal, rate of interest and time. Therefore, dividing the interest by the product of the interest rate and time will yield the principal.

`P= I/(Rate * Time)`


P means Principal

I means Interest

Also, the future amount is the sum of the principal and the interest. Therefore, the principal is just the difference between the future amount and the interest.

P = Future Amount - Interest

If only the future amount, time and interest rate are given, we can use the following formula to calculate the principall.

`P = (Future Amount)/(1+(Rate * Time))`


P means Principal

Note: The unit of time used is in years.

Example 1:

Interest is $20.

Rate of interest is 4%.

The amount is invested for 8 months.

Converting months into years;

`8 months X (1 year)/(12 months) = 2/3 years`

Using the formula for solving the principal;

Principal `= Interest/(Rate x Time)`

Principal `= 20/(0.04 x 2/3)`

Principal `= 20/(0.08/3)`

Principal `= $750`

Therefore, the principal amount to be invested is $750.

Example 2:

Future amount is $424.

Interest is $24.

Using the formula for solving the principal;

Principal = Future Amount - Interest

Principal = $424 - $24

Principal = $400

Therefore, the man borrowed $400 from his friend.

Example 3:

Future amount is $1,000,000.

Rate of interest is 2.5%.

Time of investment is 10 years.

Using the formula for solving the principal;

Principal `= (Future Amount)/(1+(Rate x Time))`

Principal = `($1,000,000)/(1+(0.025 x 10))`

Principal = `($1,000,000)/(1+0.25)`

Principal = `($1,000,000)/1.25`

Principal = `$800,000`

Therefore, the rich man should have an initial investment of $800,000.

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