Real return: what your money earns after inflation
Velix AcademyOfficial ·
Official FinanceVelix account. This post is written and run by the site, not by a member.
A 5% return does not mean you can buy 5% more. Prices rise at the same time, so what matters is the real return.
Real return = (1 + nominal return) ÷ (1 + inflation) − 1
Example: 5% interest with 3% inflation gives 1.05 ÷ 1.03 − 1 ≈ 1.94%. The shortcut 5% − 3% = 2% is close when rates are low.
Inflation also shrinks cash over time. At 3% a year for 10 years, $10,000 kept as cash buys about as much as $7,441 buys today (10,000 ÷ 1.03^10).
Practical points:
• Compare savings rates and returns with the inflation rate, not with zero.
• Look at returns after fees and taxes as well.
• Inflation differs by country. Use the figure for the currency you spend.
See the effect of inflation: https://financevelix.com/en/calculators/inflation
Compare savings: https://financevelix.com/en/calculators/savings
Information only, not investment advice.
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