What inflation does to your money
Inflation is the general rise in prices over time. When prices go up, each unit of money buys less. Money kept in a drawer loses purchasing power every year.
Two ways to look at it
- Future cost: amount × (1 + inflation)years shows what something costing today's amount will cost later.
- Purchasing power: amount ÷ (1 + inflation)years shows what today's money will be worth in today's terms.
Example
At 3% yearly inflation, goods costing 1,000 today will cost about 1,344 in 10 years, and 1,000 saved will only buy what about 744 buys today.
Protecting your savings
Compare your savings interest rate with inflation. If your account pays less than inflation, your money loses real value. Diversified investments have historically beaten inflation over long periods, but with risk.
Frequently asked questions
Which inflation rate should I use?
Use your country's recent average or the central bank's target, often around 2%.
Is inflation constant?
No. This tool assumes a constant yearly average for simplicity.
Is this historical data?
No. It is a projection based on the rate you enter.