How Interest Is Split
When your lender charges interest, the app calculates how much is deductible based on your debt composition during the billing period. This page explains the calculation methodology in detail.
The Core Principle
Interest follows the debt it's charged on. If 70% of your debt is investment-related and 30% is personal, then approximately 70% of your interest is deductible.
But debt composition can change during a billing period. You might borrow, invest, sell, or repay at any point. The app handles this by using time-weighted calculations.
The Calculation Steps
Step 1: Define the Interest Period
The interest period runs from the day after your previous interest charge through the date of the current charge.
Example: If your previous interest charge was December 31 and the current charge is January 31, the period is January 1-31.
If this is your first interest charge, the period starts from your first recorded event.
Step 2: Identify Balance-Change Events
Within the period, the app identifies every event that changed your debt composition:
- Borrowing (new debt)
- Investing (uninvested becomes invested)
- Selling (invested becomes uninvested)
- Distributions with RoC (changes invested/uninvested)
- Credit Payment events (reduces debt proportionally)
- Cash withdrawals (uninvested becomes personal-use)
- Interest Capitalization (changes principal composition)
Each such event creates a new "interval" with different balance proportions.
Step 3: Calculate Interval Balances
For each interval, the app records the balances at the start of that interval:
Eligible Balance = Invested Principal + Capitalized Deductible Interest + Outstanding Eligible Interest
Ineligible Balance = Uninvested Principal + Personal-use Principal + Capitalized Non-Deductible Interest + Outstanding Non-Eligible Interest
These represent the deductible and non-deductible portions of your total debt for that interval.
Step 4: Weight by Time
For each interval, calculate dollar-days:
- Eligible dollar-days = Days in interval × Eligible balance
- Ineligible dollar-days = Days in interval × Ineligible balance
Step 5: Calculate the Daily Interest Rate
To properly distribute the total interest across intervals:
Daily Rate = Total Interest ÷ Sum of (Days × Total Balance) for all intervals
This gives an effective daily interest rate that, applied to each interval, would produce the total interest charged.
Step 6: Allocate Interest to Each Interval
For each interval:
- Eligible interest = Daily Rate × Days × Eligible Balance
- Ineligible interest = Daily Rate × Days × Ineligible Balance
Step 7: Sum Across All Intervals
Total Eligible Interest = Sum of all interval eligible interest Total Ineligible Interest = Sum of all interval ineligible interest
These totals equal the total interest charged (subject to minor rounding).
Detailed Example
Let's walk through a realistic scenario with actual numbers.
Setup
January 1: Starting balances
- Invested Principal: $20,000
- Personal-use Principal: $5,000
- Outstanding Interest: $0
- Total Debt: $25,000
- Deductible: 80%
January 15: You borrow $5,000 for personal use
- Invested Principal: $20,000
- Personal-use Principal: $10,000
- Total Debt: $30,000
- Deductible: 67%
January 22: You invest $8,000 from a new advance plus some personal cash
- Borrowing To Invest: $8,000 on January 20
- Investment Purchase: $10,000 on January 22 ($8,000 borrowed, $2,000 personal)
After January 22:
- Invested Principal: $28,000
- Personal-use Principal: $10,000
- Total Debt: $38,000
- Deductible: 74%
January 31: Interest charge of $300
Interval Breakdown
Interval 1: January 1-14 (14 days)
- Eligible Balance: $20,000
- Ineligible Balance: $5,000
- Total Balance: $25,000
Interval 2: January 15-19 (5 days)
- Eligible Balance: $20,000
- Ineligible Balance: $10,000
- Total Balance: $30,000
Interval 3: January 20-21 (2 days)
- Eligible Balance: $20,000 (advance not yet invested)
- Ineligible Balance: $18,000 ($10,000 personal + $8,000 uninvested)
- Total Balance: $38,000
Interval 4: January 22-31 (10 days)
- Eligible Balance: $28,000
- Ineligible Balance: $10,000
- Total Balance: $38,000
Calculate Dollar-Days
| Interval | Days | Eligible | Ineligible | Eligible $ Days | Ineligible $ Days | Total $ Days |
|---|---|---|---|---|---|---|
| 1 | 14 | $20,000 | $5,000 | 280,000 | 70,000 | 350,000 |
| 2 | 5 | $20,000 | $10,000 | 100,000 | 50,000 | 150,000 |
| 3 | 2 | $20,000 | $18,000 | 40,000 | 36,000 | 76,000 |
| 4 | 10 | $28,000 | $10,000 | 280,000 | 100,000 | 380,000 |
| Total | 31 | — | — | 700,000 | 256,000 | 956,000 |
Calculate Daily Rate
Daily Rate = $300 ÷ 956,000 = 0.0003138 (approximately)
Calculate Interest Per Interval
| Interval | Eligible Interest | Ineligible Interest |
|---|---|---|
| 1 | $87.87 | $21.97 |
| 2 | $31.38 | $15.69 |
| 3 | $12.55 | $11.30 |
| 4 | $87.87 | $31.38 |
| Total | $219.67 | $80.33 |
Result
Of the $300 interest charge:
- $219.67 is deductible (73.2%)
- $80.33 is non-deductible (26.8%)
The deductible portion reflects the time-weighted average of your debt composition throughout January.
Viewing the Calculation
Click any Interest Charge event in your ledger to see the detail drawer. It shows:
- Summary: Total interest, eligible amount, ineligible amount
- Interval Table: Each interval with its dates, days, balances, and calculated interest
- Totals: Verification that interval amounts sum to the total
This transparency lets you understand exactly how your deductible interest was determined and verify the calculation matches your expectations.
Edge Cases
First Interest Charge
If you have no previous interest charge, the period starts from your first recorded event. If that event was mid-month, you might have a shorter period.
No Events During Period
If your balances didn't change during the billing period, there's only one interval. The calculation simplifies to:
- Eligible % = Eligible Balance / Total Balance
- Eligible Interest = Total Interest × Eligible %
Zero Balance Periods
If your balance was zero for part of the period (you paid everything off), that interval contributes zero dollar-days. Interest for that interval is zero.
Balance Changes on the Same Day
If multiple events occur on the same day, they're processed in order. The final balance of that day applies to the interval starting that day.
Why Time-Weighting Matters
Consider two scenarios, both with $250 interest charged in January:
Scenario A: $20,000 invested debt all month
- 100% deductible
- $250 eligible interest
Scenario B: $20,000 invested debt, but on January 15, you borrowed $30,000 for personal use
- Days 1-14: $20,000 eligible out of $20,000 (100%)
- Days 15-31: $20,000 eligible out of $50,000 (40%)
- Time-weighted: approximately 61% eligible
- ~$152.50 eligible interest
The personal borrowing mid-month reduced your deductible percentage for the second half of the month. Time-weighting captures this accurately.