Real interest rate
Real interest rate is an important concept that tells us how much money you earn or pay when you borrow or lend money. It takes into account both the interest you are charged or can earn, and the effect of inflation on the value of your money.
To explain this in an easy way: When you borrow money, or lend money, the amount of money looks the same now but it could be worth a lot more or lot less after a while. That is because the value of money can change over time due to something called inflation.
Inflation is the rate of increase in prices of things that people need to buy. It means that the same amount of money you used to buy something yesterday, might not be enough to buy that same thing today.
Real interest rate helps us to compare the amount of money we borrow or lend today, and the amount of money we get back in the future. It takes into account the interest rate we are charged or can earn, plus how inflation will affect the value of our money.
For example, let’s say you loaned someone $100 today, and get back $110 in one year. That would mean you earned 10%, or $10 in interest. However, if the inflation rate during that year was 6%, that means the value of the money you get back will be the same as the value of $94 today. This means that the real interest rate you earned was really 4%, or $4 in real interest, because you are getting back the same amount of money in a year’s time.
Real interest rate is a very important concept to understand when it comes to money, so that you can keep track of how much you are really earning or paying back.
To explain this in an easy way: When you borrow money, or lend money, the amount of money looks the same now but it could be worth a lot more or lot less after a while. That is because the value of money can change over time due to something called inflation.
Inflation is the rate of increase in prices of things that people need to buy. It means that the same amount of money you used to buy something yesterday, might not be enough to buy that same thing today.
Real interest rate helps us to compare the amount of money we borrow or lend today, and the amount of money we get back in the future. It takes into account the interest rate we are charged or can earn, plus how inflation will affect the value of our money.
For example, let’s say you loaned someone $100 today, and get back $110 in one year. That would mean you earned 10%, or $10 in interest. However, if the inflation rate during that year was 6%, that means the value of the money you get back will be the same as the value of $94 today. This means that the real interest rate you earned was really 4%, or $4 in real interest, because you are getting back the same amount of money in a year’s time.
Real interest rate is a very important concept to understand when it comes to money, so that you can keep track of how much you are really earning or paying back.
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