Inflation erodes purchasing power

A graph shows how inflation affects your money over time.

You’ve probably noticed that the prices for lots of things have gone up over the years. When the general price level of goods and services goes up, that means the purchasing power of your dollar goes down. It’s called inflation, and it can really eat away at your future purchasing power. It’s important to understand that if your money isn’t growing at a rate at least equal to the rate of inflation, you’re losing money

Here’s an example: Let’s say you stash $1,000 in a safety deposit box and leave it there for 25 years. Assuming an inflation rate of 4%, when you take the money out, your original $1,000 would only be able to purchase $368 worth of goods! So try to make sure that your money is always growing at a higher rate than the rate of inflation.

This graph shows how inflation affects your money over time.

A graph showing the decline in purchasing power for $1,000 over 25 years with three different rates of inflation. At 4% inflation, the $1,000 is worth $368 after 25 years. At 5% inflation, the $1,000 is worth approximately $300, and at 6% inflation, the $1,000 is worth a little more than $200.

Saving and investing money can help you counteract the effects of inflation.

Click the Next button to see the power of compound interest.