How to Interpret Graphs on a Compound Interest Calculator

Compound interest is an often-used method for calculating interest on borrowed money (loans and mortgages, for example) and on invested money (savings accounts, for example). If you use a compound interest calculator that shows results graphically, you can use the following procedure to help you interpret the meaning of the graph.

Instructions

1. Notice the labels on the axes. Usually compound interest graphs show time on the horizontal axis and the value of the principal on the vertical axis.

2. Examine the increments for each axis. To make the graphs more specific, they usually include tick marks that show divisions in time (months or years, for example) and in principal amount (dollars or other currency). The increments between tick marks indicate the differences in time or principal.

3. Determine the type of graph that is used. Some compound interest calculator graphs may use bars, and others may use other markings. In either case, the bar or other mark indicates the principal amount at the corresponding time on the horizontal axis.

4. Study the shape of the graph. A graph with a sharp increase (or decrease, in the case of loan repayment) over time indicates a fast-growing (or fast-shrinking) principal value. Be sure to note the intervals for principal value; a sharp increase in principal on a graph that uses relatively small intervals may not tell you much.

5. Check for any possible errors in your data. If you entered your information into the compound interest calculator incorrectly, you may see your savings account balance decrease or your mortgage amount increase; such a change probably indicates an error.