Inflation and real return: how much you actually earn on your savings

When a bank offers you 2% or a fund boasts 7% a year, it is quoting the nominal return: how many more euros you will have. But what matters to you is not euros, it is what you can buy with them. That is the real return, and the gap between the two is inflation.

Idle money loses value every year

With 3% average inflation, €10,000 kept in a non-interest account will, over the years, buy what the following amount buys today:

Years	2% inflation	3% inflation
10	€8,203	€7,441
20	€6,730	€5,537
30	€5,521	€4,120

At 3%, in 20 years your money has lost almost half its purchasing power without the account balance changing by a cent. It is a silent loss: it never shows on a statement. And it is not an exotic scenario: in July 2022 Spanish CPI reached a year-on-year rate of 10.8%.

How to calculate real return (properly)

The usual shortcut is to subtract: 7% − 2.5% = 4.5%. It gives you a rough idea, but the exact formula (the Fisher equation) is:

Real return = (1 + nominal) ÷ (1 + inflation) − 1

With 7% nominal and 2.5% inflation, the real return is 4.39%, not 4.5%. The gap looks small, but it compounds year after year like everything else. With high inflation it becomes large.

Three examples worth remembering

• 2% deposit with 3% inflation: real return of −0.97%. You are not making money; you are losing it more slowly than under the mattress.
• 3% deposit with 3% inflation: 0% real... before tax. After tax, negative (see below).
• Global fund at 7% with 2.5% inflation: 4.39% real. Here you actually grow, in exchange for volatility.

The tax trap: the tax office taxes the nominal gain

This is what almost nobody explains. Spanish income tax is levied on the nominal gain, not the real one. If a deposit pays 3% and inflation is 3%, you have gained no purchasing power, yet you pay 19% on that 3%. You keep 2.43% net against 3% inflation: a real return of −0.55%. You lose money and pay tax on top.

The lower the nominal return and the higher the inflation, the more this matters. It is one of the reasons "safe" products rarely protect wealth over the long term, and why deferring tax through fund-to-fund transfers is so valuable in Spain.

What it means for a 30-year investment

Investing €300 a month for 30 years at 7%, you would end up with about €368,126 having contributed €108,000. Sounds great. But with 2.5% inflation, that €368,126 is worth about €174,026 in today's money. Still a very good figure — more than you put in — but half of what the headline says.

With the same contribution in a 2% product you would have €148,064 nominal, worth about €69,995 today: less than the €108,000 you put in. That is the real cost of "not taking risks".

How to protect yourself from inflation

1. Do not hold more cash than you need. Your emergency fund should be in cash; the rest, working.
2. For the short term, aim at least for inflation. Treasury bills or a money-market fund tend to track ECB rates, which in turn chase inflation.
3. For the long term, diversified equities. Companies can raise prices with inflation; historically they are the asset that has beaten it best over long horizons, though not year by year.
4. Grow your contributions. If your salary rises with prices, raise what you invest each month too. The calculator lets you simulate annual contribution growth.

In short

• Real return is what matters: nominal adjusted for inflation, using (1 + n) ÷ (1 + i) − 1.
• At 3% inflation, idle money loses almost half its value in 20 years.
• Tax is charged on the nominal gain, so a product that merely "matches" inflation loses you money after tax.
• Always plan in today's euros: it keeps you from overestimating what you will have.

Educational content, not financial advice. The returns used are constant assumptions to illustrate the calculation, not forecasts.