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# What is the Real Rate of Return (RoR)?

Another important formula to know is the “real rate of return.” What makes the real rate of return distinct from other formulas is how it takes into account inflation. This matters because the reason to invest in assets like stocks, bonds, property and so on is to generate money to buy things — and if the cost of things is going up faster than the rate of return on your investment, then the “real” rate of return is actually negative.

This is especially important for low risk investments in things like money market mutual funds or bonds, which are supposed to pay out steadily and provide cash flow, as opposed to stocks which typically are valuable for how the stocks themselves go up in price.

The rate of return is the conversion between the present value of something from its original value converted into a percentage. The formula is simple: It’s the current or present value minus the original value divided by the initial value, times 100. This expresses the rate of return as a percentage.

To understand the real rate of return, we must first understand what the simple or nominal rate of return is. You have to first be able calculate this before moving on to the real rate of return.