It's easy to assume that €10,000 saved today will still be "worth" €10,000 in ten years, simply because the number in the account doesn't change. But that way of thinking ignores one of the economic concepts with the biggest quiet impact on personal finance: inflation.
What inflation is
Inflation is the widespread, sustained increase in the prices of goods and services in an economy over time. When inflation runs at 3% a year, for example, it means that, on average, you need 3% more money this year than last year to buy the same basket of goods and services.
Why money that "sits still" loses real value
If your money is in a checking account earning no return at all, and inflation is running at 3% a year, your purchasing power shrinks by roughly 3% every year, even though the euro figure in your account doesn't change at all. This is what's known as negative real return: nominally you don't lose money, but you can buy less and less with it.
An example with concrete numbers
Suppose average inflation of 2.5% a year sustained over 20 years. The purchasing power of €10,000 kept without generating any return would shrink, in real terms, to the equivalent of roughly €6,100 in today's money, even though the nominal figure in the account is still exactly €10,000. That's the silent cost of doing nothing with your money over long periods.
Nominal return vs. real return
When you evaluate any savings or investment product, the figure that really matters isn't the nominal return (the one the product advertises), but the real return, obtained by subtracting inflation from the nominal return:
Real return ≈ Nominal return − Inflation
A deposit offering a 2% nominal return, with inflation at 3%, actually has a real return of -1%, even though your balance in nominal euros has grown.
Why this reinforces the importance of investing for the long term
This is one of the strongest arguments for not keeping all your savings earmarked for long-term goals in products with no return: if the return earned doesn't at least beat the expected average inflation, the real purchasing power of those savings keeps shrinking over time, even if the nominal figure stays stable or grows slightly.
Inflation isn't constant, nor predictable with certainty
It's important not to assume a fixed inflation figure forever: inflation varies from year to year and from country to country, depending on multiple economic factors (monetary policy, energy prices, supply and demand). When making long-term financial projections, it's best to use reasonable assumptions and periodically check whether they still hold, rather than assuming a single fixed scenario for the coming decades.
Project your savings with this in mind
Our compound interest calculator lets you simulate the nominal growth of your capital under different interest rates. When you look at the result, remember to mentally weigh it against expected inflation to get a sense of your real return, not just the nominal one.