Understanding Simple Interest: Calculating Annual Earned Interest on a One-Million Peso Deposit

When you deposit money into a savings account that offers a specific annual interest rate, you're essentially earning additional money based on the interest rate. This article will walk you through the calculation of simple interest when a one-million peso deposit is made at a 1.5% annual interest rate. We will also discuss how to account for inflation and provide a detailed formula for various scenarios.

Calculating Simple Interest

Simple interest is a straightforward way to calculate the interest earned on a principal amount over a specified period. The formula for calculating simple interest is:

Interest Principal × Rate × Time

Simple Interest Calculation for a One-Million Peso Deposit

Assuming you deposit one million pesos (1,000,000) in a savings account with a 1.5% annual interest rate, the interest earned over one year can be calculated as follows:

Identify the principal (P): 1,000,000 pesos Identify the rate (R): 1.5%, which is 0.015 when converted to a decimal Identify the time (T): 1 year

Using the formula:

Interest 1,000,000 × 0.015 × 1 15,000 pesos

So, the interest earned after one year will be 15,000 pesos.

Addressing Confusion with 1.0025 Multiplier

Some people mentioned using a multiplier of 1.0025 to find the interest. This might suggest a compounded interest scenario, but for simple interest, this approach doesn't apply. The 1.0025 multiplier could confuse the calculation since it likely relates to a different rate or a different compounding method.

Impact of Inflation on Your Investments

It's also important to consider the impact of inflation on your investment. Inflation erodes the purchasing power of your money over time. If the inflation rate is 2%, for instance, your 15,000 pesos interest might not be as valuable at the end of the year as it is today.

To calculate the real value of your interest after inflation:

Interest - Inflation Rate of Initial Deposit Real Interest
25,000 - 2% of 1,000,000 25,000 - 20,000 5,000

However, the interest calculation for the initial scenario still remains the same at 15,000 pesos based on the simple interest formula.

Risk in Low Interest Rates Compared to Inflation

Even though the annual interest rate is 1.5%, if the inflation rate is higher, you may end up losing money in real terms. In the example provided, the calculated interest is 2500 pesos, but with a 2% inflation rate, the purchasing power would have decreased significantly, leading to an effective loss despite the nominal interest earned.

For a more beneficial investment, it is advisable to seek interest rates that at least match the inflation rate. In the example above, if the interest rate was 2%, it would align with the inflation rate, and you would break even in terms of purchasing power.

Conclusion

Simple interest calculations are a fundamental concept in personal finance and investment. Understanding how to calculate and how to interpret the real value of interest earned, especially considering factors like inflation, is crucial for making informed financial decisions. By using the right formulas and considering various economic factors, you can make the most of your savings and investments.