What is the Fisher equation?

The Fisher equation states: (1 + real rate) = (1 + nominal rate) / (1 + inflation rate). This gives a more accurate real return than simply subtracting inflation from the nominal rate.

Why does inflation matter for savings?

Inflation reduces purchasing power over time. $100,000 today at 3% annual inflation will only buy what $74,409 buys today in 10 years. Savings that don't beat inflation are effectively losing real value.

Inflation-Adjusted Savings Calculator | Real Value of Money Over Time

Calculator Inputs

Current Savings / Starting Amount How much you have saved today

Monthly Contribution Regular amount added each month (0 for lump sum only)

Nominal Interest Rate (% p.a.) Your savings account or investment return rate

Annual Inflation Rate (% p.a.) AU long-run average: ~2.5-3%. RBA target: 2-3%

Time Period (Years)

20 yrs

Results Summary

Real Final Value
-
In today's dollars

Nominal Final Value

Future dollars

Inflation Erosion

Lost to inflation

Real Return Rate

Fisher equation

Total Contributions

Principal + deposits

Total Interest Earned

Nominal interest

Nominal vs Real Value Over Time

Inflation Scenarios Comparison

Purchasing Power Erosion by Year

Year-by-Year Breakdown

Year	Nominal Balance	Real Balance	Inflation Loss	Cumulative Contributions	Interest Earned

How It Works

Understanding Inflation-Adjusted Returns

Inflation is the silent tax on savings. Even if your savings account earns 5% per year, if inflation is running at 3%, your real purchasing power is only growing at approximately 1.94% per year. This calculator uses the Fisher equation to give you the true picture.

The Fisher Equation

The Fisher equation, developed by economist Irving Fisher, provides the precise relationship between nominal rates, real rates, and inflation:

Real Rate = ((1 + Nominal Rate) / (1 + Inflation Rate)) - 1 Example: Nominal = 5%, Inflation = 3% Real Rate = (1.05 / 1.03) - 1 = 0.0194 = 1.94% p.a. Note: The simplified approximation (Nominal - Inflation = 2%) understates the real rate slightly.

Nominal vs Real Value

The nominal value is the raw dollar figure your savings grow to. The real value converts that future dollar figure back into today's purchasing power using the cumulative inflation factor:

Real Value = Nominal Value / (1 + Inflation Rate)^Years Example: $100,000 nominal in 20 years at 3% inflation Real Value = $100,000 / (1.03)^20 = $55,368 in today's dollars

Worked Example

Inputs: $50,000 starting balance, $500/month contributions, 5% nominal rate, 3% inflation, 20 years.

Nominal final value: ~$337,000

Real final value: ~$186,500 (in today's dollars)

Inflation erosion: ~$150,500 lost to inflation

Real return rate: 1.94% p.a. (Fisher equation)

Insight: Despite earning 5% nominally, inflation nearly halves the real purchasing power gain over 20 years.

AU Inflation Context

Australia's Reserve Bank targets CPI inflation of 2-3% per year. The long-run average since 1990 is approximately 2.7%. For conservative planning, use 3%. For stress-testing, use 4-5% (reflecting periods like 2022-2023 when AU CPI reached 7.8%).

Frequently Asked Questions

What is an inflation-adjusted return?

An inflation-adjusted return (real return) removes the effect of inflation from a nominal return. If your savings earn 6% but inflation is 3%, your real return is approximately 2.91% using the Fisher equation. This tells you how much your actual purchasing power is growing.

Why use the Fisher equation instead of just subtracting inflation?

The simple subtraction (nominal - inflation) is an approximation that slightly overstates the real return. The Fisher equation is mathematically precise. At low rates the difference is small, but at higher rates (e.g. 10% nominal, 7% inflation) the difference becomes material: simple gives 3%, Fisher gives 2.80%.

What inflation rate should I use for Australian planning?

The RBA targets 2-3% CPI. The long-run average since 1990 is ~2.7%. For conservative planning use 3%. For stress-testing use 4-5%. The ABS publishes quarterly CPI data at abs.gov.au for current figures.

Does this calculator account for tax on interest?

No. This calculator shows pre-tax nominal and real returns. To account for tax, reduce your nominal interest rate by your marginal tax rate. For example, if your rate is 5% and you pay 32.5% tax, use 5% × (1 - 0.325) = 3.375% as your effective nominal rate.

What is purchasing power erosion?

Purchasing power erosion is the difference between your nominal savings balance and what that balance can actually buy in today's terms. If you have $200,000 nominally in 20 years but inflation has reduced its real value to $110,000, the erosion is $90,000 -- that is what inflation has effectively taken from you.

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Inflation-Adjusted Savings Calculator