Real Interest Rate Calculator

What is Real Interest Rate

The real interest rate tells you how much your purchasing power increases (or decreases) after factoring in inflation. It's a more accurate measure of the return on your investment than the nominal interest rate (the rate you see advertised) because it considers the erosion of purchasing power due to inflation.

The Formula

There are two main ways to calculate the real interest rate:

Simplified (Approximation): Real Interest Rate ≈ Nominal Interest Rate - Inflation Rate

Fisher Equation (More Accurate): (1 + Real Interest Rate) = (1 + Nominal Interest Rate) / (1 + Inflation Rate)

Let's break down an example:

• Nominal Interest Rate: 5%
• Inflation Rate: 3%

Using the Simplified Method:

• Real Interest Rate ≈ 5% - 3% = 2%

Using the Fisher Equation:

• (1 + Real Interest Rate) = (1.05) / (1.03)
• Real Interest Rate ≈ 1.94%

As you can see, the simplified method gives a close approximation, but the Fisher Equation is more accurate.