Wealth Management
Real returns
What did your savings gain after prices rose?
Real return measures purchasing power. Nominal return measures currency growth.
Real return = (1 + nominal return) / (1 + inflation) − 1
Divide the money growth factor by the price growth factor. 1.08 ÷ 1.05 − 1 ≈ 2.86%, the growth in purchasing power.
An 8% return with 5% inflation produces about 2.86% real growth.
Divide the money growth factor by the price growth factor. 1.08 ÷ 1.05 − 1 ≈ 2.86%, the growth in purchasing power.
A deposit earns 5% while prices rise 8%. What is the approximate exact real return?