Simple capitalization: understand the concept and how to calculate Properly managing our money is a key skill to ensure control of our acc...

Simple capitalization: understand the concept and how to calculate

Properly managing our money is a key skill to ensure control of our accounts and to avoid going through crunching. Part of this task involves getting to know the concepts used in various financial operations.

One such concept is simple capitalization, also called simple interest. It is likely that you have already studied the subject during high school, but it is also possible that you have forgotten, even more if you have spent some time without contact with the subject.

With that in mind, we have prepared this post to explain what simple capitalization is and to show how to do the calculation in practice. Check out!

Understand the concept of simple capitalization

In a simple capitalization scheme, the interest calculation is done only on the initial value of the transaction. The interest generated over time is not added to the initial capital, so that there is no change in the rate in the following periods.

Simple capitalization is often adopted in economies that have a low inflation rate and a low real cost of producing money, since losses over time become practically insignificant.

In an opposite scenario, with high inflation and high cost of cash production, the simple capitalization regime is only recommended for short-term applications.

Learn how to do the calculation

Because it is one of the most important concepts of financial mathematics, it is crucial to know how to make the calculation of interest simple to be able to apply it in the practical situations of the day to day.

Fortunately, there is a very simple formula to help us with this task. We will need the following information:

J - total amount of interest;

C - value of principal capital;

i - interest rate;

n - term in months.

The assembled formula looks like this:

J = C x i x n

With it, you can discover any of the above information. Let's see some examples.

Calculating the total amount of interest

Taking as an example a loan in the amount of R $ 5,000.00 to be paid within 24 months and 3% interest rate per month, we have:

J = 5000 x 0.03 x 24

J = 3600

Therefore, the total amount of interest to be paid for this loan will be R $ 3,600.00.

Calculating the interest rate

Now imagine that you applied R $ 15,000.00 and had a return of R $ 1,350.00 after a period of 6 months. Let's find out the interest rate on that investment.

1350 = 15000 x i x 6

i = 0.015

Converting the result to percentage, we have an interest rate of 1.5% per month.

Calculating the time of an application

Now we will find out how long the amount of R $ 50,000.00 should remain applied to obtain an income of R $ 2,000.00 at a rate of 0.5% per month.

2000 = 50000 x 0.005 x n

n = 8

We conclude then that the amount should remain applied for the period of 8 months.

See how easy it is to understand simple capitalization and do the calculation? To stay on top of more important tips like this, subscribe now to our newsletter and do not miss any of our upcoming posts!

Properly managing our money is a key skill to ensure control of our accounts and to avoid going through crunching. Part of this task involves getting to know the concepts used in various financial operations.

One such concept is simple capitalization, also called simple interest. It is likely that you have already studied the subject during high school, but it is also possible that you have forgotten, even more if you have spent some time without contact with the subject.

With that in mind, we have prepared this post to explain what simple capitalization is and to show how to do the calculation in practice. Check out!

Understand the concept of simple capitalization

In a simple capitalization scheme, the interest calculation is done only on the initial value of the transaction. The interest generated over time is not added to the initial capital, so that there is no change in the rate in the following periods.

Simple capitalization is often adopted in economies that have a low inflation rate and a low real cost of producing money, since losses over time become practically insignificant.

In an opposite scenario, with high inflation and high cost of cash production, the simple capitalization regime is only recommended for short-term applications.

Learn how to do the calculation

Because it is one of the most important concepts of financial mathematics, it is crucial to know how to make the calculation of interest simple to be able to apply it in the practical situations of the day to day.

Fortunately, there is a very simple formula to help us with this task. We will need the following information:

J - total amount of interest;

C - value of principal capital;

i - interest rate;

n - term in months.

The assembled formula looks like this:

J = C x i x n

With it, you can discover any of the above information. Let's see some examples.

Calculating the total amount of interest

Taking as an example a loan in the amount of R $ 5,000.00 to be paid within 24 months and 3% interest rate per month, we have:

J = 5000 x 0.03 x 24

J = 3600

Therefore, the total amount of interest to be paid for this loan will be R $ 3,600.00.

Calculating the interest rate

Now imagine that you applied R $ 15,000.00 and had a return of R $ 1,350.00 after a period of 6 months. Let's find out the interest rate on that investment.

1350 = 15000 x i x 6

i = 0.015

Converting the result to percentage, we have an interest rate of 1.5% per month.

Calculating the time of an application

Now we will find out how long the amount of R $ 50,000.00 should remain applied to obtain an income of R $ 2,000.00 at a rate of 0.5% per month.

2000 = 50000 x 0.005 x n

n = 8

We conclude then that the amount should remain applied for the period of 8 months.

See how easy it is to understand simple capitalization and do the calculation? To stay on top of more important tips like this, subscribe now to our newsletter and do not miss any of our upcoming posts!

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