Inflation and your savings
I saved hard for a year and felt great. Then I went to buy the thing I’d saved for, and the price had gone up. My money hadn’t kept up.
Inflation is the general rise in prices over time. When prices go up, each unit of money buys a little less. Your savings balance can stay the same, or even grow, while what it can actually buy shrinks.
Nominal vs real
- The nominal return is the interest rate your bank pays.
- The real return is what’s left after inflation. A simple way to estimate it:
Real return ≈ interest rate − inflation rate
Say you have 1,000 in savings earning 3% a year, and inflation is 5%:
- After a year, you have 1,030.
- But things that cost 1,000 now cost about 1,050.
- So in real terms, you can buy less than a year ago, even though your balance went up.
That was the moment I understood: saving isn’t just about how much you keep. It’s about what that money can still buy later.
So should you still save?
Yes. Inflation doesn’t make saving pointless. It changes where different money should go:
- Your emergency fund still belongs in cash, in an easy-access account. Its job is to be there instantly, not to grow. Just find the best rate you can.
- Short-term goals, within a year or two, also belong in savings. You can’t risk the money dropping in value just before you need it.
- Long-term money, for goals five or more years away, usually needs to grow faster than inflation. That’s where investing comes in, which you’ll learn in Level 5.
Want to see inflation in action? It’s the first monster chasing James in Money Run.
