What Inflation Does to Your Savings: $1,000 in 30 Years

Prices rise by a percentage each year, so the effect compounds. Something costing $1,000 today costs $1,343.92 after ten years of 3% inflation. Turned around, $1,000 kept in cash has the buying power of just $744.09. The longer the horizon and the higher the rate, the more dramatic the gap:

Even “low” 2% inflation takes about a third of your buying power over 20 years. At 5%, money loses more than half its value in 15. Use the inflation calculator with your own rate.

A quick way to see the effect without a calculator: divide 72 by the annual rate to estimate the years it takes to double. At 3% inflation prices double in about 24 years; at 6%, about 12; at 2%, about 36. The same rule works for investment growth, which is why it is so useful for comparing what your money earns with what inflation takes.

A savings account paying 4% sounds fine. If inflation is 3%, your real return is about 1%: (1 + 4%) ÷ (1 + 3%) − 1 ≈ 0.97%. If inflation is 5%, the real return is negative — you are losing buying power while the balance grows. When you compare any investment, subtract inflation first. A 7% return with 2% inflation (about 4.9% real) can beat a 6% return with 4% inflation (about 1.9% real) in what it actually lets you buy.

Any long-term goal needs to be stated in future money. A retirement income of $60,000 a year in today’s prices is about $125,626.68 a year in 25 years at 3% inflation. Plan with the retirement calculator, which shows results in today’s money, and see how withdrawals interact with inflation in the 4% rule article.

• Hold cash for emergencies and near-term needs, not for decades.
• For long horizons, consider assets that have historically outpaced inflation, accepting the risk that comes with them.
• Index-linked government bonds and some deposits adjust for inflation; check the terms.
• Review your plan yearly — inflation is not constant.

This article is educational and not financial advice; the SEC’s Investor.gov explains inflation in its glossary.

Headline inflation is an average across a basket of goods and services. Your personal inflation depends on what you buy: renters, parents, commuters and retirees all face different mixes, and categories such as housing, healthcare, food and education can rise faster or slower than the average. Prices also rarely fall back after a spike; a one-off jump permanently raises the price level even when the annual rate later cools. That is why a period of low inflation can still feel expensive, and why it is sensible to build a margin into long-term plans rather than assuming the headline rate applies to your own budget.