What $5,000 is worth after 5 years of 6% inflation
After 5 years of 6% inflation, what $5,000 buys today will cost $6,691, and $5,000 held in cash will buy only $3,736 worth of today's goods, a loss of 25.27%.
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The numbers for these inputs
| Year | Cost of the same goods | Buying power of the amount | Buying power lost |
|---|---|---|---|
| 1 | $5,300 | $4,717 | 5.66% |
| 2 | $5,618 | $4,450 | 11% |
| 3 | $5,955 | $4,198 | 16.04% |
| 4 | $6,312 | $3,960 | 20.79% |
| 5 | $6,691 | $3,736 | 25.27% |
How it works
Inflation compounds like interest. If prices rise by a steady rate each year, goods that cost one amount today cost amount x (1 + rate)^years after that many years.
The other side of it is buying power: money held in cash for that long buys only amount / (1 + rate)^years of today's goods.
Real inflation changes from year to year and differs between goods, so a single steady rate is an illustration. Use it to see the size of the effect, not to predict a price.
Common mistakes
- Ignoring inflation when judging a savings rate: a 3% account in a 3% inflation year gains nothing in real terms.
- Using the average inflation of one country for a price in another.
- Assuming every price rises at the headline rate; housing, food and electronics move differently.
Questions
How much will $5,000 of goods cost in 5 years?
$6,691 at 6% a year.
What will $5,000 be worth in 5 years?
In today's buying power, $3,736: inflation takes away 25.27% of it.
What inflation rate should I use?
Many central banks aim for about 2%; use the average rate of your country over a long period rather than one recent year.
How do I protect savings from inflation?
Earn a return at or above inflation: compare the interest rate with the inflation rate, and see the compound interest calculator for the effect of growth.
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