How Inflation Affects Your Money (With Examples)

Published October 11, 2026

Free tool: Inflation Calculator→

Inflation is the gradual rise in prices over time. A few percent a year sounds small, but it compounds: the same groceries cost far more in 20 years, and cash under the mattress buys less and less. This guide shows how inflation works with worked examples, how to tell whether your savings are really growing, and how to use the free Inflation Calculator.

How inflation compounds

Prices rise on top of last year's prices, so inflation grows the same way interest does:

Future cost = today's cost × (1 + inflation rate)^years

At 3% a year, something that costs $1,000 today will cost:

Over 20 years, prices rise by about 81% in total, not 60% (20 × 3%), because of compounding.

What happens to your cash

The flip side is buying power. Cash that earns nothing loses value in real terms:

Buying power = amount ÷ (1 + inflation rate)^years

$1,000 kept as cash for 20 years at 3% inflation buys only what $553.68 buys today, a loss of about 45% of its buying power. At 3%, buying power halves in about 23.4 years.

Real returns: are your savings growing?

To know whether savings are really growing, compare their interest with inflation:

Real return = (1 + interest rate) ÷ (1 + inflation rate) − 1

A savings account paying 4% while inflation is 3% has a real return of 1.04 ÷ 1.03 − 1 = 0.97% a year. After 20 years, $1,000 grows to $2,191.12 on paper but buys what $1,213.17 buys today. The money is growing, but slowly. If the savings rate were below inflation, the real return would be negative: the balance rises while its buying power falls.

Protecting your money from inflation

• Keep only the cash you need for short-term spending and emergencies; an emergency fund is still important.
• Look for savings rates at or above inflation, such as high-yield savings accounts, CDs and Treasury bills; the CD Calculator and T-Bill Calculator show what they pay.
• Invest for the long term. Over long periods, investments such as stock index funds have historically outpaced inflation, though with ups and downs along the way.
• Ask for raises that beat inflation. The Pay Raise Calculator shows your real raise.
• Plan in today's dollars. When you project savings decades ahead, convert the result back to today's money to see what it will really buy.

How to use the Inflation Calculator

1. Open the Inflation Calculator.
2. Enter an amount, such as the cost of something today or a sum of cash.
3. Enter the annual inflation rate you expect and the number of years.
4. Enter the interest rate your savings earn, to compare with inflation.
5. Read the results: the future cost of the same goods, the future buying power of the cash, the cumulative inflation over the period and the real return on your savings. The charts and table show the effect year by year.

Frequently asked questions

How much will $1,000 be worth in 20 years?

At 3% inflation, $1,000 in cash will buy what about $554 buys today. Put the other way, goods that cost $1,000 today will cost about $1,806.

What is a real rate of return?

The return after inflation: (1 + interest rate) ÷ (1 + inflation rate) − 1. Earning 4% with 3% inflation is a real return of about 0.97%.

What inflation rate should I use?

For long-term planning, many people use 2% to 3% a year, close to the long-run targets of many central banks. Use a higher figure to be cautious, or check your country's latest official inflation figures.