Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Real Income

What it is:

Real income is inflation-adjusted income or wages.

How it works (Example):

For example, let's say John Doe works for Company XYZ. His salary is $100,000 per year. He started the job five years ago at $100,000 and has not had a raise since he took the job.

If the inflation rate is 3% per year, then the value of that $100,000 falls by 3% a year as goods and services get more expensive. As a result, after the first year on the job, John's salary is really able to buy only $97,000 of goods and services [$100,000 - (3% x $100,000) = $97,000]. In year two, John's salary is then worth only $94,090 [$97,000 - (3% x $97,000) = $94,090]. The longer this goes on, the less John's $100,000 salary buys. By the end of five years, John's salary would be "worth" only $85,873.

Why it Matters:

Real income is a measure of the purchasing power of wages. The concept is at the heart of many labor and salary negotiations.