Interest Grove

Inflation, rule of 72 & future value calculators

Real vs nominal return calculator

A balance can grow while what it buys shrinks. Take inflation out of a nominal return with the exact Fisher equation, and see how far the usual shortcut drifts.

Inflation

Educational use only — not financial advice. The nominal return is yours to enter; no return is expected or implied.

A 5.00% nominal return with inflation of 3.00% a year is a real return of

1.942%

exactly: (1 + 0.0500) ÷ (1 + 0.0300) − 1.

Shortcut: nominal − inflation
2.000%
Shortcut minus exact
+0.058 pts
$10,000 after 20 yrs
$26,532.98
In today's buying power
$14,690.67
$9,008$18k$28kyr 0yr 10yr 20
nominal balancein today's buying power

The Fisher equation

A nominal return is growth in dollars; a real return is growth in what those dollars buy. Irving Fisher set out the link in The Theory of Interest (1930): (1 + nominal) = (1 + real) × (1 + inflation). Solving for the real rate gives the exact formula; subtracting inflation from the nominal rate is the familiar shortcut.

Real = (1 + nominal) ÷ (1 + inflation) − 1 ≈ nominal − inflation

The shortcut is close when rates are small and drifts as they grow: it is off by (nominal − inflation) × inflation ÷ (1 + inflation). Choose "CPI average" to use the compound average inflation between two years from the BLS CPI-U annual averages.

Example: 5% nominal with 3% inflation is a real return of 1.05 ÷ 1.03 − 1 = 1.942%, not 2%. Over 20 years $10,000 grows to $26,532.98, worth $14,690.67 in today's buying power.

Sources

Questions

Can a real return be negative?

Yes, whenever inflation is higher than the nominal return: the balance grows but buys less.

Which inflation figure should I use?

Any rate you want to test, or the CPI-U average between two years. Past averages describe history, not what comes next.

Does this include taxes?

No. Tax is usually charged on the nominal return, so the real return after tax can be lower still.