Chapter 1: The math of time
Why cash quietly shrinks
Inflation, real returns, and the job cash is actually good at.
Hide $1,000 under a mattress for ten years. You'll still have $1,000 when you lift the mattress. It just won't buy as much.
Inflation is the general rise in prices over time. If prices rise 3% a year, something that costs $100 today costs about $134 in ten years. Your $1,000 then buys what $744 buys now. Nobody took anything from you, and you still lost a quarter of your money.
Press Play to watch buying power shrink, or scrub through the years. Set inflation to zero to see why the loss comes from rising prices.
How fast it eats
The rule of 72 works here too. At 3% inflation, prices double and cash loses half its buying power in about 24 years. Many central banks aim for around 2% a year, but they don't always hit it. Plenty of countries saw inflation above 7% in 2022, and some live with far higher rates for years. At 7%, cash loses half its value in about a decade.
Nominal and real
The number on your statement is the nominal return. What you can buy with it depends on the real return, which is growth after inflation. A rough way to get it is to subtract inflation from the nominal return.
| Where the money sits | Nominal return | Inflation | Real return |
|---|---|---|---|
| Cash under the mattress | 0% | 3% | about -3% |
| Savings account | 2% | 3% | about -1% |
| Long-term investment | 9% | 3% | about 6% |
That's why the first lesson said "6% a year after inflation." Real returns let you think in today's money. When the calculator shows about $195,000 after 30 years, that's what it would buy at today's prices. The statement in 30 years would show a bigger number, and it would buy the same.
Watch out for this when you read about investing. A fund that "returned 8%" in a year with 6% inflation made you about 2% richer.
So is cash bad?
No. Cash is the right home for money you'll need soon, like rent, an emergency fund, or a deposit you'll pay next year. Its job is to be there, at full value, on the day you need it. Investments might be down 30% that day. A common rule of thumb is that money you'll need within about five years shouldn't depend on the stock market.
The mistake is leaving long-term money in cash because it feels safe. It does feel safe, and it's almost guaranteed to lose a little every year. Over decades, a little adds up. At 3% inflation, $10,000 kept in cash for 30 years buys what about $4,100 buys today.
So split your money by when you'll need it. Short-term money sits in cash and accepts a small, steady loss. Long-term money goes somewhere it can outgrow prices. What that somewhere is comes next.
Rabbit holes
Questions worth chasing. In Learnfold, tap one and your tutor answers it as a new lesson in your course.
- Why do central banks aim for a little inflation instead of none?
- Who wins and who loses when inflation suddenly jumps?
- What happened to people's savings during hyperinflation in Weimar Germany?