Inflation Adjusted Return Calculator
Instead of focusing only on nominal rate of return, i.e. interest rates offered by banks or the returns generated by other sources. You should always concentrate on real rate of returns. In investments, what should really matter is real rate of return. Real rate of return is nothing but inflation adjusted rate of return.
What is real rate of return?
The real rate of return is the rate of return on an investment after adjusting inflation in economy. An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender.
Real rate of return formula
The real rate of return calculation formula (known as Fisher equation) is as follows:
r = (1 + n)/(1 + i) - 1
where
- r = real rate of return
- n = nominal rate (or interest rate) of return
- i = inflation rate
For example, if you have a nominal rate (interest rate) of return of 6% on an investment in a period when inflation is averaging 2%, your real rate of return is 3.922%.