Understanding Inflation and How It Erodes Your Money

Inflation is the rate at which the general level of prices rises over time, reducing the purchasing power of each unit of currency. When inflation is 3%, something that costs $100 today will cost about $103 a year from now.

A little inflation is normal and even healthy for an economy, but sustained high inflation can seriously erode savings and fixed incomes.

Money sitting in a low-interest account loses real value when inflation outpaces the interest it earns. Even though the number on your statement does not fall, the amount of goods it can buy steadily declines.

This is why simply hoarding cash is risky over the long term. To preserve and grow purchasing power, your money generally needs to earn returns that beat inflation.

Investing in assets that historically outpace inflation, such as diversified stocks, real estate, and inflation-protected bonds, helps your wealth keep up. Negotiating regular income increases also matters.

Keeping only your emergency fund in cash and investing the rest is a common balance between safety and growth.

• Invest surplus cash for long-term growth
• Consider inflation-protected securities
• Review your income against rising costs annually

Because retirement can last thirty years or more, inflation has a huge cumulative impact on retirees. A budget that feels comfortable today may fall short decades later if it is not adjusted.

Use our inflation and retirement calculators together to estimate how much your future expenses might rise and how large a nest egg you will really need.