Why the 'real rate of return' for Savings
is so important to understand
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Last update : January 2010
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| One of the foundations of personal finance is to understand how interest rates affect money.
The 'real rate of return' is where inflation is taken into account when saving money. So if inflation is running at 5% per year, most goods and services will also rise by an average of 5%.
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| However, if inflation is running at 5% a savings account will have to pay at least 5% in order to break even. So the 'real rate of return' is where the inflation rate is subtracted from the interest rate on the savings account. For example - |
- Savings account pays 8%
- Current inflation 5%
- Real rate of return = 3%
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| Summary |
| Whenever you're looking at the interest rate for savings accounts it's good practice to check the current inflation rate - look for RPI on the homepage - as the 'real rate of return' is the important figure.
See also
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Read more in the Banking & Savings section:
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