Understanding Real Returns
The number printed on your investment statement is not your return. Your return is what is left after inflation has taken its share — and in Ghana that difference has often been the whole story.
Head of Macroeconomic Research · · 2 min read
Illustrative sample. This guide was written to demonstrate FlowWealth’s publication format and is not a published research view. Figures are illustrative and must not be relied upon for any decision.
What is it?
A nominal return is the headline number — the percentage your investment paid. A real return is that number after subtracting inflation. It measures the only thing that ultimately matters: whether your money can buy more than it could before.
Why does it matter?
Money is only useful for what it buys. If your savings grow 15% while prices rise 18%, you have more cedis and less purchasing power. You have made a nominal gain and a real loss. Ghana has had extended periods where widely held savings products delivered exactly this outcome, and most holders did not realise it because the statement showed a positive number.
A Ghanaian example
A saver puts GHS 20,000 into a one-year product paying 16%. After a year the balance is GHS 23,200 — a gain of GHS 3,200. Over the same year inflation runs at 13%. The basket of goods that cost GHS 20,000 at the start now costs about GHS 22,600. The saver can afford it, with roughly GHS 600 to spare. The real gain is about 3%, not 16%. Had inflation been 18%, that same basket would cost GHS 23,600 — more than the balance — and the saver would have gone backwards despite a positive statement.
The numbers
- Nominal returnWhat the product pays
- The advertised rate
- InflationPublished monthly by Ghana Statistical Service
- The rate prices rise
- Real returnWhat actually changed about your position
- Roughly nominal minus inflation
- Precise formulaMatters when both numbers are large
- ((1 + nominal) ÷ (1 + inflation)) − 1
The subtraction, and when it stops working#
For everyday use, subtracting inflation from your nominal return is close enough. 16% minus 13% gives about 3%, and that is the right order of magnitude.
When both numbers are large — as they have been in Ghana — the shortcut drifts. The precise calculation divides rather than subtracts:
- Real return
- ((1 + nominal) ÷ (1 + inflation)) − 1
- Worked: 16% return, 13% inflation
- (1.16 ÷ 1.13) − 1 ≈ 2.65%
- Shortcut answer
- 3%
The difference is small here. At 45% returns and 40% inflation it is not, and that was Ghana at the peak of the last inflation episode.
Your inflation is not the published inflation#
Headline inflation measures a national average basket. Your basket is not that basket.
If you spend heavily on transport, imported goods or rent, your personal inflation rate may run well above the published figure. If you spend mostly on locally produced food in a year when food prices are flat, it may run below.
The published figure is the best available reference point and you should use it. Just hold it loosely, and be aware that a real return which looks marginally positive on national inflation may be negative for you specifically.
Why this reframes the last decade#
Applying this lens to recent Ghanaian history changes the picture considerably.
Periods when savings products advertised very high rates were, for many holders, periods of negative real returns — inflation was running higher still. Periods of lower advertised rates alongside lower inflation delivered better real outcomes.
The saver watching only the advertised number would have concluded the opposite in both cases. That is not a small error. Over a decade, it is the difference between accumulating wealth and slowly losing it while the statement says otherwise.
Common Mistakes
- Comparing nominal rates across countries or time periods with different inflation environments.
- Treating a positive statement balance as evidence of a gain.
- Using headline inflation when your personal spending basket differs substantially from the national average.
- Forgetting tax, which comes out of the nominal return before inflation is even considered.
- Assuming that because the rate is high, the return is good — in Ghana, high rates have often accompanied high inflation.
FlowWealth Takeaway
Before judging any investment, subtract inflation. A 25% return during 30% inflation is a loss. A 6% return during 3% inflation is a gain. Judge every opportunity on the real return, and most confusing comparisons resolve themselves.
Sources
- Ghana Statistical Service, Consumer Price Index, published monthly
This is financial education, not investment advice. It explains how something works; it does not recommend what you should do. What is appropriate for you depends on your circumstances, and FlowWealth does not provide personalised investment advice.
The FlowWealth Brief
The markets, economic developments and investment ideas that matter.
A weekly brief covering Ghanaian, African and global markets: one chart worth understanding, one investment concept explained, and FlowWealth’s view on what changed.
- Ghana, Africa and global markets
- One important chart, explained
- One investment concept per issue
- Upcoming research and events