I’m starting to sound like my father, even when I talk to myself. I find that scarier than sounding like my mother. Well, in some ways.

Here is what I literally caught myself muttering this morning as I prepared to teach my class: “Kids today, they can’t calculate anything. They have gadgets to do all their thinking so they don’t understand anything.”

If this were a movie, that’s where they’d do a freeze-frame closeup on my horrified face. Kids today? Did I really just say that?

The lesson I was planning was about understanding interest rates, what affects them, and how the media handles coverage of them. I began the grouchy muttering as I packed my laptop and looked for my keys. I knew it would take the entire class period just to give them a primer on what an interest rate is, and we’d never get to the political and economic influences, or media focus.

Teens should not reach college without knowing how to calculate interest, both simple interest and compounded interest.

My father wouldn’t let me out of 8th grade without knowing how to calculate interest. And he did not mean knowing how to push buttons on my Texas Instruments calculator. He’d be doubly appalled that kids could bypass comprehension entirely now by Googling “interest rate calculators.” At least I had to know what to multiply by on my calculator.

I am now a believer, a disciple of my father’s dogma, that two things should be outlawed at any educational institution: chewing gum and calculators.

“The privilege to use a calculator should be granted only when the person has demonstrated mastery of what he or she is calculating. A calculator is a gift of speed for those masters. It is not a portable appendage to your brain.”

“But Dad, they let us use a calculator in school.” That’s me, age 14.

“Well then, we’ll change their mind or we’ll change schools.”

Enough of me reliving my very quotable childhood with my father.

How To Calculate Simple Interest

First, a definition of simple interest: The amount paid for the use of someone else’s money. So, if you borrow money, it’s the amount you pay on the loan. If you invest money, it’s the amount you earn for investing the money. It is expressed as a percentage. Example: A 5% interest rate means that you will earn $5 for keeping $100 in a savings account for a year.

Here is the formula for simple interest:
M = P + (P x i)

M is the final amount including the principal.
P is the principal amount.
i is the rate of interest per year

How To Calculate Compounded Interest

First, the definition: Compound interest is the amount you earn not only on the original principal, but also on the interest earned earlier and left in the account. So, in the above example, after year one, there is $105 in the account, and so future interest will be calculated with P = $105 instead of $100.

Interest can be compound daily, monthly, or yearly. Daily is complex because sometimes you’re talking about including a fraction of earned interest into the principal and then calculating for the next day.

Here is the formula for calculating all compound interest.

M = P( 1 + i )n
M is the final amount including the principal.
P is the principal amount.
i is the rate of interest per year, or per day, or per month, depending what compound interest rate answer you want.
n is the number of years, or days, or months invested, depending on what compounded interest rate you’re applying.

Here’s the above example with compounded yearly interest for 3 years. Same 5% interest rate.
M = 100 (1 + 0.05)3 = $115.76.

Once your teens memorize and understand these formulas, and how to calculate interest, play a game. Show them these calculators. Let them look at each one that’s pertinent to interest (all are except the allowance calculators). There’s a savings calculator, mortgage calculator. Once they can demonstrate an understanding of how each calculator works, by writing down what the equation is that the calculator uses (and use the variables above), then let them play out savings and mortgage scenarios.

And if your teen is up for it: The Calculator Challenge

When they’re finished, see if your teens can think of a new calculator to invent. If they do, and you send it in to me, with the explanation of how it was derived and the formula or it, I’ll have the calculator made and put it up on the blog. Your teen can name it–e.g. Maria’s Can You Afford This Item Calculator–and will get full credit on the blog.

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