Most people think of taxes as something you pay to the government. But there’s another tax that quietly impacts everyone every year, that is inflation.
Values Shrink Over Time
Keeping $100,000 in cash might feel safe. But if inflation averages 3% per year, in 20 years that money will only have the purchasing power of about $55,000 in todays dollars. The number didn’t change, but what that will buy you sure did.
Nominal vs. Real Return
An individual who earns a 4 % nominal return in a high yield savings account for the year would believe they are making money. What they don’t see is that their real return is only 1%. This the return they will receive after inflation has been accounted for. To calculate a real return, you would take the (Nominal return – Inflation) or (4% - 3% = 1%). This ignores taxes which would further reduce the return.
Why it is important
Focusing on real return is critical, whether you’re building wealth or living off it.
· A younger investor might aim for $250,000 in 10–15 years, without realizing that goal won’t carry the same value later.
· A retiree drawing a fixed income may slowly lose purchasing power.
The Real Takeaway
A good financial plan isn’t just about growing money. It’s about making sure your money keeps its purchasing power. The risk isn’t just market volatility, it’s slowly losing ground every year without realizing it.