Why this matters for beginners
Many beginners assume cash is risk-free. In purchasing power terms, cash held for years usually loses value, sometimes a lot.
Main explanation
Inflation is the general rise in prices over time. €100 today typically buys less than €100 bought five years ago.
If your savings earn 1% interest and inflation is 3%, you are effectively losing 2% per year in purchasing power, even though the number on your statement goes up slightly.
Investments in productive assets, stocks, ETFs that hold real companies, have historically grown faster than inflation over long periods, though not in every year.
Inflation is also why long-horizon money usually shouldn't sit entirely in cash, and why short-horizon money still benefits from a savings account that keeps up reasonably well.
Example using a real company
Not a company-specific lesson. Think about how a coffee, a train ticket, or a rent payment has changed in price over the past 10 years.
- →€10,000 in a 0.5% savings account during a period of 3% inflation slowly loses real value year after year.
- →Long-term equity returns have historically outpaced inflation, though with significant year-to-year swings.
Common beginner mistakes
- ✕Treating cash as 'no risk'. It carries inflation risk.
- ✕Comparing returns without subtracting inflation (nominal vs real returns).
- ✕Assuming inflation is constant. It isn't.
Key terms
- Inflation
- The general rise in the price of goods and services over time.
- Purchasing power
- What your money can actually buy.
- Real return
- Return after subtracting inflation.
Key takeaways
- 01Cash has inflation risk, not zero risk.
- 02Real return matters more than the nominal number on your statement.
- 03Long-horizon money sitting entirely in cash usually loses purchasing power.
Check yourself
- 01Cash savings have zero risk.
- 02Real return is nominal return minus inflation.
Try the concept on a real company
Open a broad equity ETF in the Analyzer. The underlying companies generate revenue that often adjusts with prices over time, one structural reason equities have historically tracked or beaten inflation long-term.
Educational examples only. Not buy or sell recommendations.