Key idea
The return you see is not the return you feel. Subtract inflation, and you get the real growth in what your money can actually buy.
A nominal return is the headline percentage an investment earns. A real return is that figure after subtracting inflation. Because inflation eats into buying power, the real return is what actually tells you whether you got richer in any meaningful sense.
The subtraction that matters
Real return ≈ nominal return − inflation
Why it changes the picture
An FD paying 7% while inflation runs at 6% gives a real return of only about 1%. An investment returning 12% at the same inflation gives a real return near 6%. The gap between them is far wider in real terms than the nominal figures suggest. And an asset that returns 5% when inflation is 6% actually lost you buying power, despite the positive headline.
| Nominal | Minus | Real |
|---|---|---|
| the headline rate | inflation | what you truly gained |
| wealth by nothing. |
Finished reading?
Marking this complete counts today, and your streak becomes day 1.