When you invest money, it’s important to understand the difference between nominal and real returns, as they can significantly affect your financial planning and decision-making.

Nominal Return
Represents the total money earned on an investment without considering the impact of inflation. For example, if you invest €1,000 in a savings account and it earns €100 in a year, your nominal return is 10%. This figure is straightforward but doesn’t account for how the purchasing power of your money changes over time.

Real Return
Adjusts the nominal return for inflation, giving you a clearer picture of your investment’s actual purchasing power. Inflation erodes the value of money, meaning that what you earn today might not have the same value tomorrow. For example, if you earned €100 from an investment but inflation was 2% over the same period, the real return is slightly lower—about €98 in terms of purchasing power. This adjustment helps you understand how much your money can actually buy, which is crucial for long-term financial goals like retirement or purchasing a home.

When planning your investments, especially for the long term, it’s essential to consider both nominal and real returns. Nominal returns give you an initial sense of growth, but real returns provide a more accurate measure of your wealth increase, factoring in the cost of living changes. Checking real returns regularly ensures that you’re truly growing your wealth and not just keeping pace with inflation. This approach helps in making informed decisions and ensuring that your investments meet your future needs.