# Why cash quietly shrinks

> Inflation, real returns, and the job cash is actually good at.

Lesson 3 of 6 in [How money grows](https://learnfold.app/learn/money/), a free course from Learnfold.

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

> 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?

Read online: https://learnfold.app/learn/money/inflation/