Real Return Calculator
What an investment actually earns once inflation is taken out, and why subtracting the two numbers is not the same thing.
Results
What this tool does
A seven per cent return sounds like seven per cent more than you had. It is not, if prices rose three per cent in the meantime — and it is not four per cent either, which is the shortcut nearly everyone takes. The two effects compound against each other, so the honest figure is 3.88 per cent, and the gap widens sharply as rates rise. This page gives the real return by the Fisher equation, shows how much the quick subtraction overstates it, and follows your money out over the years so you can see the statement balance and the buying power drift apart.
Formula
Fisher equation: real = (1 + nominal) ÷ (1 + inflation) − 1
Variables
| Symbol | Meaning | Unit |
|---|---|---|
nominal | Nominal return | % |
inflation | Annual inflation rate | % |
years | Years | — |
amount | Amount | — |
RR | Real return | % |
BI | Does it beat inflation? | — |
AP | The quick subtraction | % |
AE | How much that subtraction overstates it | % |
NV | What the statement will say | — |
RV | Value in today's money | — |
LI | Eaten by inflation | — |
PK | Of that balance, this much is real buying power | % |
DY | Years to double at this rate | — |
Worked example
- Nominal return7 %
- Annual inflation rate3 %
- Years10
- Amount10,000
- Real return3.8835 %
- Does it beat inflation?Yes
- The quick subtraction4.0000 %
- How much that subtraction overstates it0.1165 %
- What the statement will say19,671.51
- Value in today's money14,637.45
- Eaten by inflation5034.06
- Of that balance, this much is real buying power74.41 %
- Years to double at this rate18.19
Limitations
- This is an informational calculator, not personalised financial advice. Rates, fees, taxes and contract conditions vary between institutions and countries.
- The tool works with whatever currency you use for the inputs; it does not convert between currencies.
Frequently asked questions
Why not just subtract inflation from the return?
Because the two effects multiply rather than add, and subtraction always flatters the result. Seven per cent against three per cent inflation is not four per cent real but 3.88 — the money you earned is itself worth less by the time you earn it. At ordinary rates the error is a tenth of a point and barely matters. At high rates it is enormous: doubling your money while prices rise fifty per cent leaves you 33 per cent better off, not 50. The subtraction is a fine mental shortcut and a bad basis for a decision.
Where should the inflation figure come from?
From the published consumer price index for the country whose currency you are holding, over the same period as the return — and this page cannot supply it, because a static site has no way to keep national price series current. Two cautions. The headline index tracks an average basket that may look nothing like your spending; if most of your money goes on rent or medicine, your personal inflation may be far higher. And the future rate is a guess, so treat any long projection here as showing the shape of the effect rather than the number.