what is real income 
real income is how much money an individual or entity makes after accounting for inflation and is sometimes called real wage when referring to an individual s income individuals often closely track their nominal vs real income to have the best understanding of their purchasing power understanding real incomereal income is an economic measure that provides an estimation of an individual s actual purchasing power in the open market after accounting for inflation it subtracts an economic inflation rate per dollar from an individual s income typically resulting in a lower value and decreased spending power 1deflation of prices can also occur which creates a negative inflation rate negative inflation or deflation will lead to a higher purchasing power of real income 2real income differs from nominal income which is not adjusted to account for fluctuating prices and living costs individuals often closely track their nominal vs real income to have the best understanding of their purchasing power 3overall real income is only an estimate of an individual s purchasing power since the formula for calculating real income uses a broad collection of goods that may or may not closely match the categories an investor spends within moreover entities may not spend all of their nominal income avoiding some of the real income s effects real income formulathere are several ways to calculate real income three basic real income formulas include the following inflation rate measuresall real income real wage formulas can integrate one of several inflation measures three of the most popular inflation measures for consumers include the consumer price index cpi cpi measures the average cost of a specific basket of goods and services including food and beverages education recreation clothing transportation and medical care in the united states the bureau of labor statistics bls publishes cpi numbers monthly and annually 4the personal consumption expenditure pce price index is a second comparable consumer price index it includes slightly different classifications for goods and services and also has its own adjustments and methodology nuances 5 the pce price index is used by the federal reserve for gauging consumer price inflation and making monetary policy decisions 6the gdp price index is one of the broadest measures of inflation since it considers everything produced by the u s economy excluding imports 7generally the three main price indexes will report relatively the same level of inflation however analysts of real income can choose any price index measure that they believe best fits their income analysis situation special considerations for investingmany individuals and businesses invest a significant portion of their income in risk free investment products and vehicles that match or exceed the economic inflation rate to mitigate the effects of inflation on their income several risk free investments offer a return of approximately 2 or more these products include high yield savings accounts money market accounts certificates of deposit treasuries and treasury inflation protected securities tips beyond that investors may be willing to take on slightly more risk to keep their income yielding at or above inflation for more sophisticated investors municipal and corporate bonds are often used for obtaining 2 returns beating inflation and helping income to grow steadily over time real wage rates