Investing

Real return

Real return is the nominal return adjusted for inflation: it measures the actual increase in purchasing power.

Formula: Real return ≈ (1 + nominal) / (1 + inflation) − 1

A 5% nominal return with 3% inflation is roughly a 2% real return. Over long horizons, this gap decides whether a savings plan actually works.

Savings accounts and deposits often deliver negative real returns during periods of high inflation, even as the nominal balance grows.

Related terms

Compound interest — Compound interest is the return generated on both the original principal and the interest already accumulated in prior periods.
Inflation — Inflation is a broad, sustained rise in prices that reduces the purchasing power of money over time.
IRR — IRR (internal rate of return) is the annual rate that equates the present value of an investment with all its cash inflows and outflows on their actual dates.

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Educational content. netclariq does not provide financial, investment, tax or legal advice.