# How does inflation affect your savings?

Inflation is prices going up over time, which means the same money buys less. Your balance does not shrink, but what it can pay for does. At 3% a year, 10,000 kept for ten years buys only what 7,441 buys today. Savings have to grow at least as fast as prices just to stay where they are. Type an amount, a rate and a number of years to see it.

## What is inflation, simply?

The general rise in prices from one year to the next. If inflation is 3%, something that cost 100 last year costs about 103 now.

It is an average across many things. Your own costs may rise faster or slower, depending on what you spend on. Rent and food often move differently from electronics.

## How much does my money lose?

Here is what 10,000 still buys after being kept without growing:

| Prices rise | After 10 years | After 20 years |
|---|---|---|
| 2% a year | 8,203 | 6,730 |
| 3% a year | 7,441 | 5,537 |
| 6% a year | 5,584 | 3,118 |

At 3%, almost half the value is gone in twenty years. Nothing was spent and nothing was stolen. Prices moved, and the money did not.

To buy in ten years what 10,000 buys now, at 3% a year, you would need 13,439.

## What is a real return?

What your savings earn, minus inflation. It is the number that tells you whether you are moving forward.

| Savings earn | Prices rise | Real return |
|---|---|---|
| 1% | 3% | about -2%: losing value |
| 3% | 3% | 0%: standing still |
| 5% | 3% | about +2%: growing |

A savings account paying 1% while prices rise 3% feels safe, and it is slowly falling behind.

## Should I stop keeping cash, then?

No. Money has different jobs, and the right place depends on the job.

| Money for | Needed in | What matters |
|---|---|---|
| Daily living | this month | being there |
| Emergency fund | any day | safe and reachable |
| A goal in one to three years | soon | not losing it |
| Long-term goals | ten years or more | keeping up with prices |

Your emergency fund is insurance. Losing a little to inflation is the price of having it ready, as explained in [how big your emergency fund should be](/blog/how-big-should-an-emergency-fund-be). Inflation is a problem for money you will not touch for many years.

## How do people keep up with rising prices?

In general terms, by keeping long-term money in things that tend to rise with prices or earn more than them over many years, and by spreading it rather than relying on one. These can also fall in value, sometimes for years, which is why they suit money you will not need soon.

What to choose depends on your country, your beliefs and your situation, and is a question for a qualified adviser, not a guide. Why time matters so much for this money is shown in [how compound interest works](/blog/how-does-compound-interest-work).

## Does inflation affect my debts?

Yes, in the opposite direction. A debt with a fixed amount gets lighter in real terms as prices and pay rise: 5,000 owed is worth less in ten years.

That does not make expensive debt a good idea. A card charging 22% costs far more than inflation ever gives back.

## What does it mean for my budget?

- **Ask for a raise that at least matches inflation.** Pay that stays the same for two years has gone down.
- **Recheck your bills once a year.** They rise quietly, and a budget built on last year's amounts stops fitting.
- **Use percentages, not fixed amounts,** for your goals. When your income rises, each goal rises with it.
- **Raise your yearly funds a little.** Next year's insurance and school fees will cost more than this year's.

What to do when your pay does go up is in [what to do with a pay raise](/blog/what-to-do-with-a-pay-raise).