investing

6 financial formulas to help you succeed

Formula No. 4: Calculate inflation-adjusted return
(1 + Investment return) -:- (1 + Inflation rate) - 1 x 100 = Real return

You know that investments have to do more than keep pace with inflation for you to build wealth. As Golden says, "A dollar today is not worth a dollar in the future." But how do you determine what your investment return is after inflation?

This equation helps you compute your real return, or your return adjusted for inflation. For example, if an investment returns 8 percent, and inflation is 3 percent, this is how you'd set up the problem:

[(1.08 ÷ 1.03) – 1] x 100 = 4.85 percent real return

"You're losing to inflation every year," says Charles Sachs, a wealth manager at Private Wealth Counsel in Miami. "Long term, inflation runs about 3 percent. So your money buys half as much in 20 years."

In other words, leaving your money stuffed under your mattress creates a real risk that you'll have significantly less purchasing power than if you had invested it.Calculating your real return helps you figure out what your future purchasing power is likely to be.

advertisement

          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

How should my teen invest $150K?

Dear Dr. Don, My son will turn 18 years old in December. He has $150,000 from a settlement now sitting in the bank. What is the best plan to pursue for investing this money? Is investing in precious metals a good way to... Read more

advertisement

Blog

Dr Don Taylor

Earnings season, investing and you

Should individual investors try to anticipate financial results in an earnings report?  ... Read more

Partner Center
advertisement

Connect with us