Lesson 5 of 5 · 5 min read
Inflation & purchasing power
Why your money in the bank secretly becomes worth less every year — and what you do about it.
What is inflation?
Inflation is the average price increase per year. At 3% inflation, what costs €100 now costs €103 next year. Your euros stay the same in number, but you can buy less with them. In the EU the European Central Bank aims for ~2% inflation per year — enough to grease the economy, low enough not to hurt too much.
The silent thief of your savings
Inflation feels invisible because your balance doesn't drop — the number in your account stays put. But its purchasing power falls. If you get 1.5% savings interest while inflation is 3%, you lose a net 1.5% of purchasing power per year. Standing still is really going backwards.
Stocky says
Always calculate with your 'real' return: nominal interest minus inflation. 2% interest at 3% inflation is actually −1%. You get poorer while you 'save'.
What inflation does over 20 years
It seems small, but it stacks up just like compounding — only against you. At 3% inflation, the purchasing power of cash roughly halves every 24 years (Rule of 72: 72 ÷ 3). €10,000 in the bank is worth only ~€5,500 in what you can buy for it in 20 years.
You put in $36,000. The other $42,139 is pure compound growth. Time does most of the work.
In practice
Your grandpa tells you a loaf of bread used to cost a few dimes. That same loaf now costs a few euros. The bread hasn't become 'better' — the euro has simply become worth less. That is inflation over decades.
Investing as defense
To preserve your purchasing power, your money has to grow faster than inflation. Stocks and real estate did that historically: companies raise their prices along with inflation, so their revenue and profit grow with it. That's why investing isn't only 'earning more', but also protecting your purchasing power against that silent thief.
Inflation peaks above 10% in the eurozone
Savers saw their purchasing power fall sharply in a single year while savings rates lagged behind. The year underscored why 'just saving' costs money in the long term.
Cash is not useless
This doesn't mean you have to invest everything. An emergency buffer belongs in cash — there, immediate availability counts more than the small short-term loss of purchasing power. Inflation is mainly a problem for money you leave sitting for years. That money should be growing.
Remember this
- Inflation is the average price increase; your balance stays, but your purchasing power falls.
- Real return = interest − inflation. Saving below inflation costs you money.
- Over decades cash halves in purchasing power — inflation stacks up like compounding, but against you.
- Investing lets your money grow faster than inflation; cash remains fine for your emergency buffer.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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