Don’t Let Inflation Erode Your Savings Power

You check your account statements and see a 3% return on your money market fund last year. Nice, right? But when you check the inflation rate—4% in that year—you realize your purchasing power actually shrank. This is inflation’s hidden danger: even “positive” returns can leave you poorer in real terms.

In the 1970s and early 1980s, rampant inflation wiped out nest eggs. Savers learned that nominal returns—the numbers you see on statements—can be misleading without accounting for inflation’s bite. Economists define real return as the nominal return minus inflation. It’s the percentage by which your buying power actually grows.

Take two portfolios: one with a 5% nominal return and another with 8%. If inflation averages 3%, the real returns are just 2% and 5% respectively. Over decades, compounding a higher real return leads to dramatically larger outcomes—often the difference between financial security or struggle.

Understanding real versus nominal returns steers you toward investments that earn enough to outpace inflation. It also underscores the importance of tax-advantaged accounts, where returns grow undiminished by annual taxes. Being aware of this concept changes how you choose your portfolio, focusing on real gains—not just nominal ones.

Calculate your own real return by subtracting average inflation from your average nominal return. If the result is unimpressive, rebalance by shifting extra money into higher-growth assets—like stocks or tax-advantaged retirement accounts—that can outpace inflation over the long haul.