What inflation does to your money
Inflation is the slow rise in prices over time. It’s easy to ignore year to year, but it compounds — and over a decade or two it quietly reshapes what your money is worth.
Two sides of the same coin
Inflation works in both directions. Things you buy cost more later (amount × (1 + rate)ʸ), and the cash you hold buys less later (amount ÷ (1 + rate)ʸ). At 3% for 20 years, $1,000 of goods will cost about $1,806, and $1,000 in cash will buy only about $554 of today’s goods. See it in the Inflation Calculator.
Why cash quietly loses
If your savings earn less than inflation, you’re losing purchasing power every year even though the number on the statement goes up. That’s the real reason long-term money is usually invested rather than left in cash.
Protecting your money
- Long-term: assets that historically outpace inflation — stocks, real estate, index funds.
- Inflation-linked bonds (e.g. TIPS) are designed to keep pace with prices.
- Keep an emergency fund in cash anyway — its job is safety, not growth.
Frequently asked questions
- What inflation rate should I plan with?
- The long-run US average is roughly 2–3% per year, and the Federal Reserve targets 2%. Use a higher figure to stress-test plans and a lower one for a best case.
- Why does inflation matter for retirement?
- Because it compounds over decades, a nest egg that looks large today buys far less in 30 years. Retirement planning should target inflation-adjusted (real) spending, not just a nominal number.
- Is a little inflation good?
- Most economists think mild, steady inflation (around 2%) is healthier than zero or falling prices, because deflation can stall spending and investment.
Run your own numbers
Put this guide into practice — these calculators run free in your browser.