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Real Interest Rate Calculator

Convert a nominal rate and inflation into your true, inflation-adjusted real interest rate.

How it is calculated

Both inputs are annual percentages. The exact real rate follows the Fisher equation: real = ((1 + i/100) / (1 + π/100) − 1) × 100, where i is the nominal rate and π is the inflation rate. The tool also shows the quick approximation i − π. The two agree closely when rates are low and drift apart as inflation rises. Negative results are valid and mean purchasing power is lost. Inflation of −100% or lower is rejected. Both figures are shown as percentages to two decimals. The tool does not account for tax on interest, which lowers the real return further.

Worked example

A deposit pays 6% a year while inflation is 3.5%. Exact: 1.06 / 1.035 = 1.02415, minus 1 gives 0.02415, which the tool shows as 2.42%. Approximation: 6 − 3.5 = 2.50%. The 0.08 point gap is the difference between the exact and the shortcut method; your purchasing power grows by about 2.42% in the year.

Try this example →

Common mistakes

  • Entering rates as decimals (0.06) rather than percentages (6).
  • Using the approximation at high inflation. At 6% nominal and 8% inflation the simple gap is −2.00 points, but the exact real rate is −1.85%, so the shortcut overstates the loss; use the exact figure.
  • Comparing a nominal rate with a rate that is not for the same period, for example monthly interest against annual inflation.
  • Using last year's inflation when you really want an expected future figure; the result is only as good as that forecast.
  • Ignoring taxes and fees, which the tool leaves out, so the actual real return is usually lower than shown.

Sources

About this calculator

This calculator converts a nominal interest rate into a real interest rate using the exact Fisher equation, (1 + real) = (1 + nominal) / (1 + inflation), alongside the simpler textbook approximation of just subtracting inflation from the nominal rate.

Savers and investors use it to see whether a savings account or bond is actually growing their purchasing power or merely keeping pace with rising prices, and economics students use it to see how much the quick approximation diverges from the precise formula at higher inflation rates.

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Comments (1)

  • Editorial team

    Interest is usually taxed before inflation eats into it, so for a taxable account enter the after-tax nominal rate instead of the advertised one. If 6% is taxed at 20%, you keep 4.8%, and against 3.5% inflation the exact real rate falls from 2.42% to about 1.26%. Which inflation figure do you use when you test a savings rate, last year's or an expectation?

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