Your savings balance is growing. Why does it feel like it buys less?
You’ve been careful. The balance in your savings account has gone up every year, a little at a time. And yet the money doesn’t seem to stretch as far as it used to. Groceries cost more, rent went up again, and the cushion you built feels thinner than the number on the screen suggests. That feeling isn’t imagined, and understanding why can change where you keep your money.
Two numbers, not one
When we check a savings account, we look at one number: the balance. But what that balance can do for you depends on a second number that never appears on the statement, which is how much prices have changed since you saved it.
Economists call the first one the nominal value and the second the real value, or purchasing power. A balance can rise in nominal terms while falling in real terms. That happens whenever your account earns less interest than the rate at which prices rise.
The relationship is simple enough to estimate in your head. Subtract the inflation rate from your interest rate, and the result is roughly how fast your purchasing power is changing. If your savings earn 0.5% and prices rise 3% a year, your money is losing about 2.5% of its buying power each year, even as the balance grows.
What that looks like over five years
Imagine two people, each with $20,000 set aside and each leaving it alone for five years while prices rise 3% a year.
The first keeps the money in an account paying 0.5%, which is common at large banks. After five years the balance is $20,505. It went up. But in today’s dollars, that $20,505 buys what about $17,688 buys now. Their savings lost more than $2,300 of purchasing power while appearing to grow.
The second keeps the same $20,000 in an account paying 4% APY. After five years the balance is $24,333, which buys what about $20,990 buys today. Their money didn’t just keep up with prices; it grew a little in real terms.
Both people did the responsible thing and saved. The only difference was the rate their savings earned, and over five years that difference is worth more than $3,000 of buying power.
This isn’t only a hypothetical. When inflation reached 6.5% in 2022, bank accounts paid an average of well under 1%, and depositors lost an estimated $1.1 trillion in purchasing power in a single year.
Why rates vary so much between banks
It’s natural to assume that savings accounts all pay roughly the same. They don’t. Some large banks pay a small fraction of a percent on standard savings, while online banks and credit unions often pay many times more on accounts with the same FDIC or NCUA insurance.
Banks set their own rates, and those that rely on customers who rarely move their money have little reason to raise them. That isn’t a judgment of anyone who banks there. Convenience, a branch nearby, and having everything in one place are real benefits. It’s just worth knowing what that convenience costs.
What inflation figure should you use?
The most widely quoted measure is the Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics. It measures the average change in prices for a broad basket of goods and services.
Your own inflation rate may be higher or lower. If rent or childcare is a large part of your budget and those costs have risen quickly where you live, your personal inflation rate may be higher than the national figure. Looking at your own biggest expenses over the past few years gives you a better sense of what your savings need to keep up with.
What you can check
Start with the rate you’re actually earning. It’s on your statement or your bank’s rate page, usually as an APY. Compare it with recent inflation. If the gap is large, your savings are losing ground, and moving them could make a meaningful difference without taking on investment risk.
Then think about what the money is for. Cash you might need soon, like an emergency fund, belongs somewhere safe and accessible, and a high-yield savings account fits that well. Money you won’t need for many years faces a different trade-off, because keeping up with inflation over decades usually means accepting some investment risk.
To see the effect with your own numbers, the inflation calculator shows what today’s prices could become and what your savings would buy, and the high-yield savings calculator shows how much a better rate would add.
What this can and can’t tell you
Inflation isn’t steady, and nobody knows what it will be next year. Savings rates change too. The examples here use constant rates to make the effect visible, not to predict it. What holds up across almost every scenario is the direction: money earning less than inflation loses buying power over time, and the longer it sits, the more it loses.
Sources
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This article is general education about US personal finance, based on the assumptions and sources described in it. It isn’t financial, tax or legal advice, and examples use hypothetical people and figures.