How inflation erodes money
Inflation is the rate at which prices rise, which is the same as the rate at which each dollar buys less. The damage compounds: a 3% increase this year applies to prices that already rose 3% last year. That is why $50,000 left as cash for 20 years at 3% inflation doesn't lose 60% of its buying power - it ends up purchasing only what about $27,700 buys today, while you would need roughly $90,300 in 20 years just to match what $50,000 buys now.
This calculator applies a single constant rate that you choose - it does not use historical CPI data, and real inflation varies year to year and by what you actually buy (housing, healthcare, and education have often risen faster than the headline rate). The rule-of-72 figure shown is a quick approximation: divide 72 by the inflation rate to estimate how many years until prices double.
Frequently asked questions
Why does inflation compound against you?
Each year's price increase applies to prices that have already risen, so the erosion snowballs just like compound interest in reverse. At 3% inflation, prices don't rise 60% over 20 years - they rise about 81%, cutting the purchasing power of idle cash nearly in half.
What inflation rate should I assume for planning?
Most central banks, including the Federal Reserve, target about 2% per year. The long-run US average is closer to 3%, with occasional spikes well above that. Using 2.5-3% is a reasonable middle ground for long-term planning.
How do I protect savings from inflation?
Keep cash in an account paying a rate above inflation rather than a near-zero checking account. For long horizons, diversified equities have historically outpaced inflation, and inflation-protected government bonds adjust their value with the price index by design.