The real interest rate is the rate of interest an investor expects to receive after adjusting for inflation. It reflects the true purchasing power of money over time. For example, if a bank offers a nominal interest rate of 5% but inflation is 2%, the real interest rate is approximately 3%. This means that the actual increase in value of the money saved or invested is only 3%. Understanding the real interest rate is crucial for making informed financial decisions. It helps individuals and businesses assess the profitability of investments and savings. By considering the real interest rate, people can better plan for future expenses and ensure their money retains its value against rising prices.