Economy · General financial education

Interest and real returns

Interest is the price of borrowed money. The real rate approximates the purchasing power left after prices change.

In more detail

Nominal interest measures the money return. Real interest also accounts for purchasing power. Approximately: real interest = nominal interest minus inflation.

Background

The exact real rate is (1 + nominal rate) / (1 + inflation rate) − 1. Expected inflation gives an expected real rate; realised inflation gives a backward-looking rate. Taxes and fees require separate treatment.

An example

Example: 3% interest and 2% inflation yield about 0.98% real growth before tax.

A common misconception

The nominal interest rate tells you how much more you can afford.

Purchasing power also depends on prices. The real rate approximates that (tax is separate).

Source: Deutsche Bundesbank · Realzinssätze. Last reviewed: 2026-11-09. Editorially reviewed on 2026-11-09. Next review 2027-11-09. Version 0.2.0. Finmon explains. It does not advise. Not investment, tax or legal advice.