🎯 Goal: Understand inflation erodes money and how to respond.
You understand inflation erodes purchasing power: if savings interest is below inflation, real money still "shrinks" even as the number grows. Look at the real return.
Let’s explore
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Inflation lowers the purchasing power of money over time: the same money buys fewer goods.
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If savings interest is below inflation, real money still “shrinks” even as the number grows.
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Sensible long-term investing is one way to help money grow faster than inflation.
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Real return ≈ Nominal return − Inflation. Example: savings 3%/year, inflation 5%/year → real ≈ 3 − 5 = −2%. The account grows 3%, but prices rise 5% so real purchasing power falls 2%. Purchasing power is what matters.
Practice activity
🧮 Inflation is 5%/year but savings interest is only 3% — does your real money grow or shrink?
Worked example: Inflation 5%/year but savings interest only 3%/year. You compute: 3% − 5% = −2%. The account number rises, but real purchasing power falls 2% — your real money still “shrinks”.
Quick quiz
1. Inflation makes money’s purchasing power?
→ Fall over time
2. If savings interest < inflation, then?
→ Real money still shrinks
3. A way to grow money faster than inflation?
→ Sensible long-term investing
4. Real return is approximately?
→ Nominal return − Inflation
5. 4%/year return, 6%/year inflation, real return?
→ About −2%
6. Real purchasing power falls when?
→ Savings interest is below inflation
🎯 Real-life mission
Estimate: at 5% inflation, what is 100,000d worth next year in today’s terms.