How does inflation affect savings?

Inflation's primary impact on savings is that it erodes the purchasing power of money over time. When inflation increases, the cost of goods and services rises, meaning that the same amount of money will buy fewer items in the future than it does today. For example, if you have $100 saved, and the inflation rate is 3% per year, then in a year's time, that $100 will only be able to purchase what $97 could buy today. This gradual decrease in purchasing power highlights why long-term saving strategies must consider the inflation rate to maintain or grow real wealth.

While nominal savings may increase in certain scenarios, they do not necessarily account for inflation's impact on value. Similarly, while higher interest rates on savings accounts can sometimes occur, they are not guaranteed and often do not keep pace with inflation, leading to real losses in purchasing power. Over time, if inflation remains unchecked, it can significantly diminish the effectiveness of savings, underscoring the importance of understanding how inflation affects financial decisions and saving strategies.