Inflation, and what your money is actually worth

A salary that never rises is a salary that falls. How to think in real terms instead of nominal ones.

Money has two values. There is the number — the balance on the screen — and there is what that number can actually buy. Inflation is the gap between them, and it widens quietly enough that most financial plans are made in the wrong units.

The number is called nominal. What it buys is called real. Almost every mistake in long-term planning comes from thinking in nominal terms when the question was a real one.

What a fixed sum does over thirty years

$100,000 held at a constant 3% inflation. The dashed line is the balance, which never changes. The falling line is what it buys.

At 3% a year — roughly the long-run US average, though it has been well above and below — $100,000 buys about $74,409 worth of goods after ten years, and roughly $41,199 after thirty.

Nothing was taken from the account. The balance is identical. The world simply got more expensive around it, and the number stopped meaning what it used to.

Running it the other way

The same arithmetic explains why older relatives' salary figures sound so strange. A $40,000 salary in 1996 required about $97,090 in 2026 to buy the same basket of goods — a difference of $57,090 across 30 years.

Which means a salary that stays flat is a salary that falls every year. A 2% raise against 3% inflation is a real-terms pay cut of about 1%, delivered in a way that feels like a modest win. Judging a raise against inflation rather than against zero is one of the more valuable habits available.

Where this changes decisions

Cash is not risk-free. It is guaranteed against one risk — the number never drops — and fully exposed to another. A savings account at 0.5% against 3% inflation loses about 2.5% of purchasing power a year, reliably. Safe in nominal terms, a slow loss in real ones.

Retirement targets need to be stated in today's money. A projection showing $2,000,000 in thirty years sounds like comfort. At 3% inflation it buys about $823,974of today's goods — still substantial, but not the number you were imagining. Any calculator that shows only nominal balances is flattering you.

Fixed-rate debt quietly improves.Inflation is the one thing that works in a borrower's favour. Your mortgage payment is fixed in nominal terms, so as wages and prices rise around it, the payment consumes a smaller share of your income each year. A thirty-year fixed mortgage is partly a bet that money will be worth less later — a bet that has usually paid off.

What actually protects against it

Assets whose value rises with the price level: equities, since companies raise prices too; property, whose rents and values track inflation over long periods; and inflation-linked government bonds, which adjust explicitly.

None of these are safe in the short term, which is the genuine trade-off. Cash is stable month to month and erodes decade to decade; equities are volatile month to month and have historically outpaced inflation decade to decade. Which risk you should hold depends entirely on when you need the money — short horizon, take the erosion; long horizon, take the volatility.

The habit worth forming

When a figure covers more than a few years, ask what it is worth in today's money before reacting to it. Long-term projections in nominal dollars flatter every plan, and the adjustment is a single division — but almost nobody does it, which is why the number on the screen keeps winning the argument.

Examples use a constant 3% for clarity. Real inflation moves year to year, and your personal rate depends on what you actually buy — housing, healthcare, and education have historically risen faster than the headline index.