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 simple interest per year on a deposit of This means that the simple interest earned on in one year is 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 simple interest each year.

Years	Amount of Simple Interest	Balance

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