Inflation is a fact of life, and it accounts for higher-priced products and declines in the buying power of the dollar. This reduced buying power also reduces the effectiveness of your investment. Although many formulas exist for calculating a return on investment, or ROI, these formulas do not give you the full story. To find out what your real ROI is, you need to factor in inflation.
1. Subtract the amount of your initial investment from its final value, and then divide by the initial amount to calculate your nominal return. As an example, if you invested $10,000 and it grew to $12,000, then your nominal return is 0.20.
2. Add one to this figure. In the example, you would have 1.20.
3. Divide this figure by the inflation rate, plus one. In the example, if the inflation rate was 0.036, then you would divide 1.2 by 1.036 to derive 1.1583.
4. Subtract one from that figure to calculate the real return. In the example, your real return would be 0.1583, or 15.83 percent.