Inflation
Cash that sits still loses purchasing power every year.
In One Sentence
As prices slowly rise, the same money buys less and less; cash that just sits there quietly shrinks every year.
Why It Matters
Many people feel the bank is the safest place for their money, because the number never goes down. But even though the number in your account hasn't shrunk, what it can buy has — a loss you can't see. So here's what I do: keep the emergency fund in bank deposits, and put long-term money into the whole market, which grows.
One Number
In the US from 1871 to 2026, after inflation, stocks with dividends returned about 7.8% a year and 10-year government bonds about 2.6%, while cash lost about 2.3% of its purchasing power each year (author's calculations from Shiller data · Chapter V).
In the Book
Chapter I warns that idle money gets eaten by inflation. Chapter IV reminds you that compounding's hundred-million-plus fortunes are nominal amounts. Chapter V uses real returns to compare stocks, government bonds and cash.
Go Further
- Bonds and cash In its early years, the Nobel Foundation could keep its money only in deposits and government bonds, and inflation and taxes ate into it.
- Jeremy Siegel He compiled two centuries of US data: after inflation, stocks returned about 6.5% to 7% a year.
- Broad-market index ETFs Mild inflation drives growth in corporate profits, and owning the whole market lets you share in it.
- The retirement gap The retirement calculation leaves out inflation, so the real gap can only be bigger.