{"id":11737,"date":"2018-10-12T14:00:06","date_gmt":"2018-10-12T06:00:06","guid":{"rendered":"http:\/\/www.comparehero.my\/blog\/?p=11737"},"modified":"2026-03-27T12:10:28","modified_gmt":"2026-03-27T04:10:28","slug":"interest-rates-nominal-meets-real-meets-effective-2","status":"publish","type":"post","link":"https:\/\/www.comparehero.my\/blog\/bank-news\/interest-rates-nominal-meets-real-meets-effective-2.html","title":{"rendered":"Interest Rates: Nominal meets Real meets Effective"},"content":{"rendered":"

\"different<\/p>\n

Updated: 12th October 2018<\/em><\/p>\n

As we have already seen inflation can be a tricky monster<\/a>. It gets even worse when it comes to savings \u2013 yes, the inflation monster is affecting your savings; and not in a good way.<\/p>\n

When looking at interest there is a nominal interest rate and a real interest rate. And then, there is also the effective interest rate, at which we will have a closer look at.<\/p>\n

Nominal Interest Rate vs Real Interest Rate<\/strong><\/h2>\n

The “nominal interest rate<\/strong>” is the rate banks offer you for depositing money in one of their savings accounts.<\/p>\n

The “real interest rate<\/strong>” is the rate you are effectively getting if you plan to buy goods and services with money you have put in your savings account. The real interest rate is determined by subtracting the inflation rate from the nominal interest rate.<\/p>\n

Real interest rate = Nominal interest rate \u2013 inflation rate<\/strong><\/p>\n

If a bank offers you 5% interest on your savings and the current inflation is about 3.8%, your real interest rate would be 1.2%. The following example shall illustrate what is going on:<\/p>\n\n\n\n\n\n
Savings Year 0: RM1,000<\/td>\nAmount Spend Year 0: RM1,000<\/td>\n<\/tr>\n
Interest Rate: 5%<\/td>\nInflation Rate: 3.8%<\/td>\n<\/tr>\n
Savings Year 1: RM1,050<\/td>\nAmount Spend Year 1: RM1,038<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Total earnings after the first year: RM12; instead of RM50. The result is, inflation took away almost 80% of your earnings.<\/p>\n

However, if you have a loan, inflation can be a good thing, as displayed in the following example:<\/p>\n\n\n\n\n\n\n
Loan Year 0: RM1,000<\/td>\nLoan Year 1: RM1,000<\/td>\n<\/tr>\n
Interest Rate: 5%\/Inflation Rate: 0%<\/td>\nInterest Rate: 5%\/Inflation Rate: 10%<\/td>\n<\/tr>\n
Interest Payment: RM50<\/p>\n

This applies under the assumption, that your salary increases by the inflation rate (in this case here: 10%) as well<\/td>\n

Theoretical Interest Payment: -RM50<\/p>\n

 <\/td>\n<\/tr>\n

<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The result is, that theoretically, your interest payment is negative, which means that your increase in salary is higher than the interest payment you have to make for your loan.<\/p>\n

It can even get worse if the inflation is higher than your savings, which would lead to a loss of money, even though you think, you are saving money.<\/p>\n

Handling Nominal and Real Interest Rates<\/strong><\/h2>\n

\"Nominal<\/p>\n

Cross-check your investments on a regular basis and evaluate your potential earnings on interest rates with the current inflation. Are you still on top of inflation? If yes, perfect; if not, consider the following advice:<\/p>\n