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

Show Bankrate's community sharing policy
          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

Can heirs cash an old trust?

Dear Dr. Don, The youngest of 6 children, I am 48 years old. My father joined the Navy at 22. In Italy, he met his bride and my mother, and returned to the U.S. to raise our family. In 1959, he bought a trust certificate... Read more

advertisement

Blog

Dr Don Taylor

Choppy markets make investors seasick

On Monday, the U.S stock market opened lower on weak economic news out of China and lower oil prices. If China's economy catches a cold, does Europe get the flu?  ... Read more

Partner Center
advertisement

Connect with us