What Is Inflation and How Does It Affect Your Money?

Inflation is the reason $100 in 2000 only buys about $55 worth of goods today. If your money isn't growing faster than inflation, you're losing purchasing power every year. Understanding inflation is one of the most important financial concepts you can learn.

What Causes Inflation?

• Demand-pull: When more money chases the same amount of goods, prices rise
• Cost-push: When production costs rise (oil, wages), companies pass costs to consumers
• Money supply: When the government prints more money, each dollar buys less
• Supply chain disruptions: Fewer goods available means higher prices for what exists

How Inflation Destroys Savings

At 3% annual inflation, $100,000 in a savings account paying 0.5% APY is effectively worth about $97,600 in one year. After 10 years, it has the purchasing power of roughly $74,000. Your account balance grows, but your ability to buy things shrinks.

The Rule of 72: How Fast Does Inflation Halve Your Money?

Divide 72 by the inflation rate to get the number of years until purchasing power is cut in half. At 3% inflation, your money's purchasing power halves in 24 years. At 7% (2022 levels), it halves in just about 10 years.

How to Beat Inflation

• Stocks: Historically return 7-10% annually, beating 3% inflation by 4-7% per year
• Real estate: Property values and rents tend to rise with inflation
• I-Bonds: US government bonds that adjust with inflation (up to $10,000/year per person)
• TIPS: Treasury Inflation-Protected Securities — principal adjusts with CPI
• High-yield savings accounts: Beat regular savings, but barely keep up with inflation
• Avoid: Cash under the mattress, regular savings accounts, low-rate CDs