1. What is Real Return?

Real return is the return on an investment after accounting for inflation. It shows the actual purchasing power gained or lost from an investment, unlike nominal return which doesn't consider inflation.

2. How Does the Calculator Work?

The calculator uses the real return formula:

Where:

• \( \text{Nominal Rate} \) — The stated interest rate (as decimal)
• \( \text{Inflation Rate} \) — The inflation rate (as decimal)
• \( \text{Principal} \) — The initial investment amount

Explanation: The formula adjusts the nominal return by the inflation rate to show the true increase in purchasing power.

3. Importance of Inflation Adjustment

Details: Inflation erodes purchasing power over time. A CD might show a positive nominal return but could actually lose purchasing power if inflation is higher than the interest rate.

4. Using the Calculator

Tips: Enter the principal amount, nominal interest rate (as percentage), and expected inflation rate (as percentage). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why calculate real return instead of just looking at nominal return?
A: Nominal returns don't account for inflation, which can give a misleading picture of actual purchasing power gained.

Q2: What's a good real return for a CD?
A: Ideally, you want a positive real return. Even small positive returns preserve purchasing power, while negative real returns mean losing purchasing power.

Q3: How accurate is this calculation?
A: It provides a good estimate if you know the exact inflation rate, but future inflation is always uncertain.

Q4: Does this account for taxes?
A: No, this is pre-tax real return. For after-tax real return, you'd need to factor in your tax rate.

Q5: Can I use this for other investments besides CDs?
A: Yes, the formula works for any investment where you know the nominal return and inflation rate.