Guide
Nominal vs Real Returns
Nominal returns are the headline percentage gain. Real returns look at purchasing power after inflation. Here’s the simple breakdown and a quick example you can try.
Published: March 12, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
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Model nominal returns and then test a “realistic” scenario with a lower rate to reflect inflation.
Open the calculatorQuick answer
Nominal return: percent increase in money. Real return: percent increase in purchasing power after inflation. A simple rule of thumb: real ≈ nominal − inflation (just an approximation).
See inflation-adjusted examplesDisclaimer
Educational purposes only; not financial advice. Examples are illustrative; real returns vary and investments can go down as well as up. Fees, taxes, inflation, and account rules vary by provider and country.
Definitions
Nominal return is the percentage gain on money without adjusting for inflation. Example: a £1,000 balance earns 5% nominal in a year and becomes £1,050.
Real return adjusts for inflation to show how purchasing power changed. If inflation is 2.5% and the nominal gain is 5%, the real gain is only the part above inflation.
Why it matters: long-term goals depend on what your money can buy, not just the headline percentage.
Inflation example
Starting amount: £1,000. Nominal return: 5% per year. Inflation: 2.5% per year.
- Nominal end of year: ~£1,050
- Approx real return (rule of thumb): ~2.5% (5% − 2.5%)
- Meaning: purchasing power grew, but by less than the headline 5%
| Item | Value (approx.) |
|---|---|
| Starting amount | £1,000 |
| Nominal end of year | ~£1,050 |
| Inflation impact (2.5%) | Reduces buying power |
| Real gain (approx.) | ~2.5% gain in purchasing power |
Why real returns matter
- Long-term saving: buying power matters for future goals.
- Fair comparisons: align inflation assumptions when comparing options.
- Avoid “false progress”: nominal gains can mask flat purchasing power.
Cautions and limitations
- Inflation changes over time; past levels may not hold.
- Personal inflation can differ from headline CPI depending on your spending mix.
- Fees and taxes also reduce real outcomes.
Use the calculator with this idea
Run two quick scenarios in the calculator:
- Nominal: use the headline rate (e.g., 5%).
- “After inflation”: use a lower rate (e.g., 2–3%) as a rough stand-in for real growth.
Read more on adjusting for inflation here: inflation-adjusted compound interest.
Open the calculatorFAQ
What is a nominal return?
It’s the percentage change in money before adjusting for inflation.
What is a real return?
It reflects the change in purchasing power after accounting for inflation.
Is real return always lower than nominal?
If inflation is positive, real return is typically lower. If inflation were negative, real could be higher.
How do I estimate real return?
A quick approximation is nominal minus inflation. More precise methods discount by (1 + inflation).
Does inflation affect savings accounts too?
Yes. If the rate is close to inflation, purchasing power may change only slightly.
Why is my personal inflation different?
Spending patterns differ. Your mix of housing, food, transport, and services may not match the overall CPI basket.
Compare assumptions in the tool
Run a nominal rate and an “after inflation” rate to see how the projections differ.
Open the calculator