How Inflation Affects Your Savings (And How to Calculate It)

It's the "silent thief" of personal finance. You check your bank account, and the number is the same, but somehow, you can buy less than you could last year. That's inflation.

What is Inflation?

Inflation is the rate at which the general level of prices for goods and services is rising. Consequently, the purchasing power of currency is falling.

If inflation is at 3%, a loaf of bread that cost $1.00 last year would cost $1.03 this year. That doesn't sound like much, but over 20 or 30 years, it destroys wealth if left unchecked.

The Impact on Cash Savings

Many people feel "safe" keeping their money in a checking account or under the mattress. In reality, this is one of the riskiest things you can do over the long term.

Let's say you have $100,000 in cash today. If inflation averages 3% per year:

You haven't "lost" any dollar bills, but you've lost more than half of your wealth.

How to Beat Inflation

To preserve and grow your wealth, your money needs to earn a return that is higher than the rate of inflation.

1. Invest in the Stock Market

Historically, the S&P 500 has returned about 10% annually (before inflation). Even after adjusting for 3% inflation, that's a 7% real return.

2. Real Estate

Real estate prices and rents usually rise with inflation, acting as a natural hedge.

3. High-Yield Savings Accounts (HYSA)

At a minimum, keep your emergency fund in a HYSA. While it might not fully beat high inflation, it earns significantly more than a traditional checking account (0.01%).

Conclusion

Inflation is inevitable, but losing your purchasing power isn't. By understanding how it works and investing wisely, you can ensure your money works as hard as you do.