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What is inflation?
Inflation is the slow rise in prices across the economy over time. A gallon of milk that costs $4 today might cost $4.10 next year and $5 in ten years. Inflation is usually measured each year as a percentage. In the United States, it has averaged about 2% to 3% per year over the long run, but it can be higher or lower in any given year.
Buying power
Buying power is what your money can actually purchase. If you have $100 today, you can buy $100 worth of stuff today. But if prices rise 3% over the next year, that same $100 will only buy about $97 worth of the same stuff. Your dollar amount did not change, but your buying power did.
Nominal vs. real returns
The nominal return is the raw growth of your money in dollars. If you start with $1,000 and end with $1,070 a year later, your nominal return is 7%.
The real return is what is left after you subtract inflation. If your nominal return is 7% and inflation is 3%, your real return is about 4%. Real return tells you whether your buying power actually grew.
When the "Adjust for inflation" toggle is on, this page shows real values in today's dollars. When it is off, the page shows nominal values, which are the actual future dollar amounts.
Compound growth
Compound growth means your earnings start earning their own returns. In year one you earn interest on your starting balance. In year two you earn interest on the starting balance plus last year's interest. Over many years this snowball effect can become very large.
Inflation also compounds. A 3% inflation rate does not just reduce your buying power by 3% over many years. It reduces it by 3% each year on top of the prior year, which adds up to a much larger drop over decades.
The three account types
Stocks represent ownership in companies. Over long periods, the stock market has historically returned around 7% to 10% per year on average, well above inflation. Stocks can lose value in any given year, so they are best suited for long-term goals.
A money market account is a type of savings account offered by banks. It typically pays more interest than a checking account but less than stocks. Returns are more stable, and the account is usually insured up to certain limits.
Not every savings account is a money market account. Many basic savings accounts pay very low interest rates, similar to a checking account. To get the higher rates shown in this calculator, look for accounts labeled high-yield savings account or money market account. Online banks often offer the most competitive rates.
A checking account is designed for everyday spending. It pays very little interest, often well below inflation. Money sitting in a checking account for years tends to lose buying power.
Periodicity and compounding frequency
Periodicity is how often the calculator applies a return. Monthly periods compound 12 times a year, quarterly periods compound 4 times a year, and yearly periods compound once a year. More frequent compounding produces slightly higher growth from the same annual rate.
Why the gap widens over time
Small differences in return rates may look minor in year one but become large over many years. A 7% return doubles your money in about 10 years. A 0.5% return takes more than 140 years to do the same. This is why long time horizons reward investments that beat inflation, and punish ones that do not.
Key takeaway
Keeping money in a low-return account feels safe because the dollar amount never falls. But once you account for inflation, that money is quietly losing value every year. Investments that grow faster than inflation are the ones that preserve and build real buying power over time.