How Inflation Erodes Savings
Inflation causes the value of money to decrease over time, meaning your savings buy less than before.
Featured in the Monday, August 10 edition →
It's often said that inflation matters only when your bank balance goes down—in fact, your balance can rise while your purchasing power falls if prices rise faster than the account does.
Understanding inflation is important because it affects how much your saved money can actually buy in the future, influencing decisions on spending, saving, and investing.
Imagine you have 10 candies saved, but every year, candies get a little less tasty and worth less, so your saved candies can't get you as many treats later.
Inflation changes the real value of every dollar you set aside, so planning for a future goal means thinking about what that money will buy later, not just how much is in the account.
Suppose you save $100 in an account that earns 2% over a year, making the balance $102. If the things you want become 3% more expensive, they now cost $103 instead of $100, so your larger balance still buys slightly less.
Interest can help savings grow
A savings account that pays interest can add money over time, helping your balance keep up with some of the rising cost of things.
Cash has a different job
Keeping some money easy to reach is useful for emergencies and near-term purchases, even if it may buy less over many years.
Long-term goals need more planning
For goals far in the future, people often consider ways to grow money because leaving it untouched may make it harder to afford what they want later.