# Solve it the easy way: Compound interest problems

One type of GRE quant question involves compounding interest. If you get such a problem, your first thought should be to avoid calculating the amount of compound interest exactly. There is a complicated formula for doing that, but here, we’ll go over a simpler, quicker method.

Consider the following question from *The Economist*’s GRE Tutor question bank:

*Kate made a deposit in a savings account that pays 5% compound interest annually two years ago. If her current balance is $1,323, how much did she deposit in the account?*

*A) $1,000*

*B) $1,100*

*C) $1,200*

*D) $1,300*

*E) $1,400*

Compound interest is not much different from simple interest, so let’s just think of this as a simple interest problem, work out how much simple interest she would have earned, do some quick addition, and we should have our answer.

Start with Option B. I suggest this because, if we see that Option B is too small, we can eliminate Option A at the same time, without having to calculate it.

5% of 1,100 is $55.

Two years of interest at this rate would yield $110.

1,100 + 110 = 1,210. This is not enough. Eliminate Options A and B.

Look at Option D. If she started with 1,300, she would have earned more interest than $23. Eliminate Options D and E.

At this point, it would not be necessary to calculate using Option C, but just for peace of mind, let’s do that.

5% of $1,200 is $60.

For two years this is $120.

1,200 + 120 = 1,320 and this is very close to the figure using compound interest of $1,323. Option C it is.

Remember: in many areas of GRE math, you don’t have to calculate things exactly. It is often easier and quicker to estimate. You’ll have more time for the harder questions that will come.