Real interest rate calculator
A savings account paying 8 % while prices rise 3 % does not make you 8 % richer. The real interest rate is what your money gains in buying power. Choose which rate to find, enter the other two and an amount: the calculator applies the exact Fisher equation, shows the quick approximation next to it and what the amount grows to in money of the day and in today's money.
Runs in your browser: nothing you enter is sent anywhere.
How to use it
- Choose what to find: the real rate, the nominal rate or inflation.
- Enter the other two rates as yearly percentages.
- Optionally enter an amount and a number of years to see what it grows to.
The Fisher equation links the three rates: (1 + nominal) = (1 + real) × (1 + inflation).
- Real rate = (1 + nominal) ÷ (1 + inflation) − 1, approximately nominal − inflation
- Nominal rate = (1 + real) × (1 + inflation) − 1, approximately real + inflation
- Inflation = (1 + nominal) ÷ (1 + real) − 1, approximately nominal − real
The amount at the end is amount × (1 + nominal)^years; in today’s money it is divided by (1 + inflation)^years, which is the same as amount × (1 + real)^years.
Worked example
A deposit pays 8 % a year and inflation runs at 3 %:
- Real rate = 1.08 ÷ 1.03 − 1 = 4.8544 %; the approximation 8 − 3 = 5 % is off by 0.1456 points.
- 10,000 for 5 years grows to 10,000 × 1.08^5 = 14,693.28.
- In today’s money that is 14,693.28 ÷ 1.03^5 = 12,674.55.
To earn a real 2 % with 4 % inflation you need a nominal rate of 1.02 × 1.04 − 1 = 6.08 %.
Tips
- Compare rates over the same period: a monthly rate with yearly inflation gives nonsense.
- Taxes on interest are charged on the nominal rate, so the real return after tax is lower still.
- The exact formula matters most when inflation is high.
Frequently asked questions
How do you calculate the real interest rate?
Exactly: real = (1 + nominal) ÷ (1 + inflation) − 1. With a nominal rate of 8 % and inflation of 3 %: 1.08 ÷ 1.03 − 1 = 4.8544 %. The shortcut nominal − inflation gives 5 %.
When is the approximation good enough?
When rates are low. The error is about real rate × inflation: at 8 % and 3 % it is 0.15 points, but with 40 % interest and 30 % inflation the shortcut says 10 % while the exact real rate is 7.69 %.
What does a negative real interest rate mean?
Prices rise faster than the interest you earn, so your savings lose buying power. At 3 % interest and 5 % inflation, 1,000 grows to 1,343.92 in ten years but buys only what 825.05 buys today.
Which inflation rate should I use?
For a past period, the actual inflation over it. For a deposit or bond you are about to buy, your expectation for its term. The Fisher equation itself does not care which: it links the three rates for one period.