An account paying a stated rate tells you how the balance grows in currency terms. Whether it grows in purchasing power depends on what prices do over the same period.
This explains the distinction rather than commenting on any particular rate or product.
Nominal and real
The core distinction.
The nominal rate is the stated figure — what the balance increases by.
The real return is approximately that rate minus inflation, and it describes what happens to purchasing power.
Which means a balance can grow in currency terms while buying less than it did, if inflation exceeds the rate.
This is not a hypothetical situation. It has been the position for savers over extended periods in many economies.
The rough calculation
Subtracting inflation from the nominal rate gives a close approximation for small figures.
The precise relationship is slightly different and matters more when the numbers are large, and the approximation is adequate for most purposes.
Which means an account paying a modest rate during a period of higher inflation produces a negative real return, and the balance loses purchasing power despite growing.
Which inflation figure
Worth knowing since several exist.
National statistics offices publish headline inflation measures based on a basket of goods and services intended to represent typical spending.
Different measures include different items — housing costs are treated differently between measures, which is the most common source of divergence.
And an individual household's experienced inflation differs from the headline figure, depending on what it actually spends on. Households spending a large proportion on categories rising faster than average experience higher inflation than the published number.
Some statistics offices publish calculators allowing a personal inflation rate to be estimated, which is more informative than the headline for this purpose.
Tax on the nominal amount
A complication worth understanding.
Interest is generally taxed on the nominal amount received rather than on the real return.
Which means tax is paid on growth that may not represent any increase in purchasing power.
Tax treatment varies substantially by jurisdiction and by account type, with tax-advantaged savings accounts existing in many systems specifically to address this.
This is an area where the rules are specific and getting it right matters, which makes it a question for a qualified adviser rather than for general reading.
Compounding frequency
A smaller effect that is worth knowing about.
Interest paid more frequently and left to accumulate produces slightly more than the same rate paid annually.
Standardised comparison rates exist in many jurisdictions precisely to make products comparable across different payment frequencies.
Which means comparing headline rates without checking whether they are the standardised figure can be misleading, and the standardised figure is generally the one to use.
Fixed and variable
The trade that matters when rates are moving.
A fixed rate provides certainty and forgoes any increase during the term.
A variable rate follows the market in both directions.
Which means the choice depends partly on a view about future rates, which nobody holds reliably, and partly on whether certainty is worth more than potential upside.
Fixed terms also generally restrict access, which interacts with the emergency fund considerations discussed separately.
The comparison worth making
For anybody reviewing where cash is held.
The rate actually being received, which for accounts opened some time ago is frequently well below current market rates, since introductory rates expire and existing customers are not automatically moved.
The current best available rate for equivalent access and protection.
And the inflation rate over the same period.
Those three figures establish whether a balance is gaining or losing purchasing power, which is the question the headline rate does not answer.
The protection point
Worth including in any comparison.
Deposit guarantee schemes protect balances up to a limit per institution, and the limit applies across accounts held with the same banking licence rather than per account.
Which means large balances spread across brands that share a licence may be less protected than the holder assumes, and checking the licence structure is worthwhile above the threshold.
Reviewing where cash sits
The practical exercise that follows from all of this.
Introductory and bonus rates expire, frequently after twelve months, reverting to considerably lower rates without any notification that draws attention.
Which means balances left in place drift onto poor rates, and this is a well-documented pattern that providers rely on.
An annual check of the rate actually being received, against current available rates, is a short exercise that frequently produces a meaningful difference.
Setting a calendar reminder when opening any account with an introductory rate is the mechanism that makes the check happen.
Notice and fixed accounts
Where the trade between rate and access is priced.
Notice accounts require a defined period before withdrawal and generally pay more than instant access.
Fixed-term accounts pay more again and restrict access entirely, sometimes with a penalty for early closure and sometimes with no access at all.
Laddering — holding several fixed terms maturing at intervals — is a common arrangement providing periodic access while capturing most of the rate advantage.
Whether any of that suits depends on how likely the money is to be needed, which is the same question the emergency fund discussion turns on.