Nominal vs Real Returns.

In plain English

A nominal return is the headline number, the percent your money grew before accounting for anything else. A real return takes that number and subtracts inflation, which is the rate at which prices rise. The real return tells you whether you can actually buy more than you could before, not just whether the dollar figure went up. If your investment grew but prices grew faster, your real return is negative even though the nominal number looks positive.

01Why it matters

Your savings can grow on paper and still lose ground if prices rise faster, so the real return is the number that tells you whether you are actually getting wealthier.

02The math, step by step

Take a simple illustration. Say an investment earns a 7 percent nominal return in a year while inflation that year runs 3 percent. The real return is roughly 4 percent. The dollar amount grew 7 percent, but the true gain in what the money can buy is closer to 4 percent. These figures are made up to show the math, not current readings.

03What this is NOT

04Receipts

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