The interest that is applied only to an initial amount of money is called simple interest. The initial amount is known as the principal. Simple interest is calculated as a product of principal, annual interest rate, and the time in years.

An interest rate is a percent used to calculate the interest on the principal. It may be easier to write it in decimal form to make the calculations easier. For instance, assume that a savings account earns 3% simple interest per year on a deposit of $1000. 1000 * 0.03* 1= $ 30 This means that the simple interest earned on $1000 in one year is $30. The final amount of money in the account is called the balance. The following table shows the balance over five years of an account that earns 3 % simple interest each year.

Years	Amount of Simple Interest	Balance
1	1000 * 0.03* 1=$ 30	1000+30=$ 1030
2	1000 * 0.03* 2=$ 60	1000+60=$ 1060
3	1000 * 0.03* 3=$ 90	1000+90=$ 1090
4	1000 * 0.03* 4=$ 120	1000+120=$ 1120
5	1000 * 0.03* 5=$ 150	1000+150=$ 1150

Notice that the balance at the end of each period is calculated by adding the principal and simple interest earned during that period.