It is important to consider the real rate of return on an investment before looking to make an investment. In today’s time inflation rate is 5.7%, which means it is reducing the value of money as time passes by and taxes certainly take a chunk away too.
What's left -- the real rate of return -- often can be unimpressive after considering these adjustments. Accordingly, investors must consider whether the risk associated with the investment is appropriate given the real rate of return.
Conclusion
When you are looking at the interest rate after a particular investment, remember there are two ways of looking at this number, the nominal interest earned and the real interest earned.
However, the major difference between both the interest rates is that the former is adjusted for inflation. This is why, most of the time, one’s nominal rate of interest is always higher than the real rate of interest.
To know the exact purchasing power, you can calculate the real rate of return by subtracting the inflation rate of your country from your nominal interest earned on any single investment.
