Nominal vs Real Interest Rate

The nominal interest rate is the stated percentage on a loan or investment, not considering inflation. The real interest rate adjusts this rate to account for inflation, reflecting the true increase in purchasing power. For example, if you earn a 5% nominal interest rate but inflation is 2%, your real interest rate is approximately 3%, meaning your money's value actually grows by 3%. This distinction helps investors and borrowers understand the actual growth of their money after inflation, providing a clearer view of true returns or costs.