Inflation and time
Two forces work quietly every day: inflation erodes purchasing power, compounding makes money grow. Time decides which one wins.
Inflation erodes purchasing power
With steady 2% yearly inflation, 100 euros today buy in twenty years what about 67 euros buys now. Idle cash is not "safe": it slowly loses real value.
Compound growth
At a steady 5% a year, 1,000 euros become about 1,629 after 10 years, 2,653 after 20 and 4,322 after 30. Interest earns interest: growth is not linear.
This is arithmetic, not a forecast: real returns are not constant and can be negative.
Real return
What matters is return after inflation: roughly nominal return minus inflation. A 3% return with 3% inflation leaves purchasing power unchanged.
Costs and taxes matter too: a 1% yearly fee, over the long run, eats a significant share of the final capital.
In short
- Inflation: the real value of money falls over time.
- Compounding: growth accelerates with the years.
- Look at real return, after inflation, costs and taxes.
- Numeric examples are arithmetic, not forecasts.
Check your understanding
An account pays 1% a year while inflation is 3%. Does purchasing power rise or fall?
Show the answer: It falls, by about 2% a year: real return is roughly 1% - 3% = -2%.
Why do 1,000 euros at 5% over 30 years not become 2,500 (1,000 + 30 × 50)?
Show the answer: Because interest accumulates on interest already earned: growth compounds and reaches about 4,322 euros.