How Inflation Shrinks Your Savings

Prices compound, just like interest

Inflation is the rate at which prices rise. At 3% a year, something that costs $1,000 today costs $1,000 × 1.03¹⁰ = $1,343.92 in 10 years. Turned around, $1,000 kept as cash will buy only what $744.09 buys today.

The Inflation Calculator works out both numbers for any amount, rate and number of years.

The rule of 72

Divide 72 by the inflation rate to estimate how many years it takes prices to double, and so for cash to lose half its buying power. At 3%, that is about 24 years; the exact answer is 23.4.

Real return: what you actually gain

What matters for savings is the interest rate minus inflation. A savings account paying 1% when inflation is 3% loses about 1.9% of its buying power every year, even though the balance goes up. To keep up, savings need to earn at least the inflation rate after tax.

• Use the Compound Interest Calculator to see how a balance grows at a given rate.
• Use the Savings Goal Calculator with a goal raised for inflation, so the money you save still covers what you are saving for.