Inflation is the general rise in prices over time. When prices rise, each unit of money buys less. Your savings balance may grow in numbers while shrinking in what it can actually buy. To judge whether savings are really growing, you need to look at them after inflation.
Purchasing power
The future buying power of money, in today’s prices, is:
Real value = Amount ÷ (1 + inflation)years
If inflation averages 3%, then $10,000 kept as cash for 10 years will buy what $7,440.94 buys today. Put another way, something costing $10,000 now would cost about $13,439 in 10 years.
Real interest rates
The real return on savings is the interest rate after inflation:
Real rate = (1 + interest rate) ÷ (1 + inflation) − 1
- Savings at 4%, inflation 3%: real rate ≈ 0.97%. You are growing, slowly.
- Savings at 3%, inflation 3%: real rate 0%. You are standing still.
- Savings at 0.5%, inflation 3%: real rate ≈ −2.4%. You are losing ground.
Example over 10 years
| Where $10,000 is kept | Balance after 10 years | In today’s money (3% inflation) |
|---|---|---|
| Cash, 0% | $10,000.00 | $7,440.94 |
| Bank account, 0.5% monthly | $10,512.60 | $7,822.36 |
| Savings at 4% annual | $14,802.44 | $11,014.41 |
Only the 4% account keeps ahead of inflation. The low-rate account grows by about $513 on paper but loses more than $2,100 of buying power.
Inflation and the Rule of 72
The Rule of 72 works for prices too. At 3% inflation, prices double in about 72 ÷ 3 = 24 years (exactly 23.4). At 6%, in about 12 years. Long-term goals — retirement, a child’s education — need to be planned in future prices, not today’s.
What this means for savers
- Emergency savings belong in safe, easy-to-access accounts even if they barely beat inflation. Their job is safety, not growth — but it is still worth choosing the best rate available.
- Money for goals years away may need investments with higher expected returns, which come with more risk. A licensed adviser can help you weigh that trade-off.
- Taxes are charged on nominal interest, so the after-tax real return can be lower than it first appears.
- Some governments issue inflation-linked savings products designed to protect purchasing power; availability varies by country.
How to include inflation in your plans
- Project your savings with your expected interest rate.
- Divide the result by (1 + inflation)years to see it in today’s money.
- Or, as a shortcut, run the projection using the real rate.
The Investment Growth Calculator shows both the future balance and its value in today’s money. For the rate theory behind it, read How Interest Rates Work.