Understanding your "real return" and why it matters is a key part of saving and investing. In our explainer video series, we walk through the effect of inflation on your savings and investment returns.
Here's an example. Let’s say you have £1,000 and you want to save it towards a purchase that you plan to make in a year’s time. The best savings account you can find offers an interest rate of 3%. So your £1,000 will grow into £1,030 in a year’s time. Is that good or bad? The answer is, we don’t know.
That 3% interest rate is the “nominal” return on your savings. What we need to know is the “real” return. That is, your return after inflation is taken into account. This matters because inflation reduces the value of a future sum of money.
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