MEPX
Chapter 7 of 10All chapters
  1. 1Simple against compound
  2. 2The arithmetic
  3. 3The rule of 72
  4. 4Why starting early wins
  5. 5Compounding against you
  6. 6Compounding frequency
  7. 7Real against nominal
  8. 8Fees compound too
  9. 9Regular contributions
  10. 10Exponential thinking

Chapter 7 of 10

Real against nominal

Growth that is not growth.

Subtract inflation

A 5 percent return with 3 percent inflation is about 2 percent real. Only the real figure tells you whether your purchasing power grew.

  • Cash earning less than inflation loses value with perfect reliability.
  • Inflation compounds too, which is why long horizons need real figures.

Taxes

Tax on returns reduces the compounding base every year. Tax-advantaged accounts matter for exactly this reason, and the effect is larger than most people expect.