The real interest rate is the interest rate minus the inflation rate.

Real Interest Rate = Interest Rate - Inflation Rate


If we want to increase the purchasing power of the money we save, the interest we earn must be greater than the rate of inflation. We need a positive real interest rate. If a lender is to make money on a loan, the lender's interest rate must be higher than the inflation rate.

Here is an example based on 2017 statistics. Assume you have money is in a basic commercial bank savings account earning 1.5% interest per year, and the inflation rate is 2.9%. The real interest rate is -1.4%. Your money actually is losing purchasing power.
Real Interest Rate = 1.5 - 2.9
Real Interest Rate = -1.4

Think about this...

Merchants may offer goods for sale with no payments, and no interest for one year! The premise is that you can invest the cost of the item for a year. At the end of the year, you have the original amount of money (which you now need to pay for the item), the interest from your investment (which is yours to keep), and the items (which you've used, free, for a year). 

Would purchasing these goods be wise?

Purchasing the item could be a sound decision if
  • you actually need the item now,
  • you have the full cost of the item available for investment at a real interest rate, and
  • you will pay the full cost of the item as soon as it is due.