If your savings account pays 5% a year and prices rise by 15%, your money is not growing. It is shrinking. The figure on your statement goes up, but what that money can buy goes down. The gap between the two is your real return, and it is the number that matters.

Nominal versus real

The nominal return is what your investment pays. The real return is what is left after inflation. A quick estimate is to subtract inflation from the nominal return. The precise version is:

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

A worked example

Say you hold ₦1,000,000 in a savings account paying 5% a year, and inflation is 15%.

  • After a year, your balance is ₦1,050,000.
  • But things that cost ₦1,000,000 last year now cost ₦1,150,000.
  • In last year's money, your ₦1,050,000 buys what about ₦913,000 bought then.

That is a real return of about minus 8.7%. You lost almost a tenth of your purchasing power while appearing to earn interest.

Why it compounds

One year of negative real returns is a setback. Several years in a row is a serious loss. At minus 8.7% a year, money loses about a third of its purchasing power in less than five years. Inflation does its damage quietly, which is exactly why it is so easy to ignore.

What can beat inflation

No investment is guaranteed to beat inflation every year, but some have a better chance over time than cash in a bank.

  • Fixed income at the right price. Treasury bills, bonds and sukuk can offer yields above inflation, especially when bought while rates are high.
  • Equities. Companies that can raise their prices with inflation can grow earnings in real terms, though share prices are volatile in the short run.
  • Dollar assets. These protect against naira depreciation, which often travels together with high inflation.

What to do with this

  1. Work out the real return on what you hold now, using the formula above.
  2. Keep only the cash you genuinely need for emergencies and near-term spending in low-yield accounts.
  3. Put longer-term money into a diversified mix aimed at beating inflation over years, not months.

M20 Robo is designed to make the third step straightforward, with portfolios built around your goals and time horizon, and reporting that shows your returns after inflation as well as before.

This article is for general information only and is not investment advice. Investments can go down as well as up. Speak to a qualified adviser about your own circumstances.