# Inflation and the real rate of return > A 14% deposit is not 14% richer: find the real rate of return by taking off the tax on interest, then inflation, and see what your savings can really buy a year later. - Course: [Personal Finance: Budget, Safety Cushion, Debt and Investing](https://productovi.com/courses/personal-finance.md) - Module: Where should savings live? - Lesson 17/32, ~17 min - Source: https://productovi.com/courses/personal-finance/inflation-and-the-real-rate ## Fourteen percent that isn't **Alex Tutor:** You're still helping Dana, now with her savings and what they earn. **Dana:** My savings just sit on the card. A bank ad says 14% a year on a 12-month deposit. So in a year I'm 14% richer, right? **Alex Tutor:** Richer in hryvnias, a bit. Richer in what you can buy, much less. That second number is your real rate of return: what savings earn after the tax on interest and after inflation. Let's take the two steps one at a time. **Alex Tutor:** The 14% is the **nominal rate**: the number on the ad. As of September 2026, the bank keeps back 23% of the interest, not of your money: 18% personal income tax plus the 5% military levy. You get the rest automatically. **Sofia:** So on 100,000 the interest is 14,000 before tax. **Alex Tutor:** Yes. Now work out what actually lands on the account after the bank takes its 23%. > **Exercise:** 100,000 UAH goes into a 12-month deposit at 14% a year. The bank withholds 23% of the interest. How much **interest after tax** lands on the account at the end of the year? In UAH. ## What the money can buy **Sofia:** 10,780 after tax. So the deposit really pays 10.78% a year. **Alex Tutor:** In hryvnias, yes. But a hryvnia next year buys less than today. That's **inflation**: prices in Ukraine rose 8.1% in the year to August 2026. Groceries, rent, a haircut: the same basket costs more. **Dana:** So I subtract 8.1 from 10.78? **Alex Tutor:** That's a quick shortcut, and it's close when both numbers are small. The exact **real rate** divides instead of subtracting: it asks how much more your money buys at the end than at the start. The math is in [Real and nominal rates](/courses/math-basics/real-and-nominal-rates). $$ r = \frac{1 + n}{1 + i} - 1 $$ *r: the real rate; n: the rate you keep after tax on interest; i: inflation over the same period.* **Alex Tutor:** Use the after-tax rate, not the 14%. Then plug in the inflation figure. > **Exercise:** The deposit pays 10.78% a year after tax, and inflation over the same year is 8.1%. What is the **exact real rate**? In %, rounded to two decimals. ## Nominal vs real return: three numbers **Dana:** 2.48%. From 14% on the ad to about two and a half. That's a bit depressing. **Alex Tutor:** It's still positive, and that's the point: your 100,000 buys about 2.5% more a year later. The shortcut gives 10.78 − 8.1 = 2.68%, a little too generous. Fine for a quick check, not for a decision. **Sofia:** And 14 − 8.1 = 5.9% is the mistake people make when they forget the tax. **Alex Tutor:** Exactly. Keep the order: the ad's rate, then tax, then inflation. Each number answers a different question. > **Exercise:** Match each number from Dana's example with what it tells her. ## Doing nothing has a price too **Dana:** Fine, but on the card there's no tax and no risk. At least I don't lose anything there. **Alex Tutor:** You lose quietly. The number stays the same while prices go up. Two years at 8% inflation, and 100,000 on a card buys what 85,734 buys today. That's a real loss of about 14%, with no fee and no bad news. **Sofia:** So the real rate of a card at 0% is just minus inflation. **Alex Tutor:** Close: (1 + 0) / 1.08 − 1 ≈ −7.4% a year. Some money should still sit there, the part you may need tomorrow. The question is how much, not whether. > **Exercise:** **True or false:** if inflation is higher than a deposit's rate after tax, the deposit's real return is negative, even though the balance in hryvnias grows. ## Which inflation to use **Dana:** But 8.1% is last year. What if prices rise faster next year? **Alex Tutor:** Then the real rate shrinks. A deposit locks the nominal rate for its term; inflation isn't locked. Last year's figure is a guide, not a forecast. The central bank aims for 5%, and actual inflation has been above that. **Alex Tutor:** So test a range: what if inflation is 6%, 8% or 12%? If the deposit only wins in the friendliest case, it's not much of a plan. **Sofia:** And deposit rates move too. In late September 2026 the big banks' 12-month hryvnia deposits paid roughly 13–14%. **Alex Tutor:** Right, so check today's numbers before deciding anything. The method stays the same: tax first, then inflation, then a range. > **Exercise:** Dana wants to know whether a deposit protects her savings from rising prices **for the next year**. What is the most useful check? ## Your turn: explain it to Dana **Dana:** My sister says a deposit is pointless if it doesn't beat inflation. I'd like to explain it to her properly, in plain words and with numbers. **Sofia:** Half right, then. A deposit that loses to inflation is a poor deal. But this one doesn't lose, and the card loses for certain. **Dana:** That's the part she won't believe without numbers. **Alex Tutor:** Take 100,000 for a year at 14%: what the bank pays, what tax takes, and what's left after inflation. And say why the card isn't the safe alternative it looks like. > **Exercise:** Dana's sister says: "A deposit is pointless if it doesn't beat inflation, so I keep everything on my card." Write Dana's reply in 3–5 sentences. Use 100,000 UAH for a year at 14%, 23% tax on interest and 8.1% inflation, and say what happens to money on the card. > **Key ideas** > > - The **nominal rate** is the number on the ad. As of September 2026, the bank withholds 23% of deposit interest (18% personal income tax + 5% military levy): 14% becomes **10.78%**. > - The **real rate** is what your money gains in what it can buy: (1 + after-tax rate) / (1 + inflation) − 1. At 8.1% inflation: 1.1078 / 1.081 − 1 ≈ **2.48%**. > - "After-tax rate minus inflation" (2.68%) is a shortcut; "ad rate minus inflation" (5.9%) is a mistake. > - Money at 0% loses quietly: two years at 8% inflation turn 100,000 into 85,734 in today's money. > - Inflation isn't locked like a deposit rate: test a range of 6–12%, and check current rates before deciding. This is educational, not personal financial advice. **Alex Tutor:** Next: the currency question. Should savings for a goal be in hryvnias or in dollars? - Previous lesson: [Case: Dana's 12-month budget](https://productovi.com/courses/personal-finance/twelve-month-plan-case.md) - Next lesson: [Hryvnia or dollars: the currency of a goal](https://productovi.com/courses/personal-finance/currency-of-a-goal.md) --- Productovi Learning. Free, no sign-up needed to read.