You have €10,000 in the bank. Ten years from now, you’ll still have €10,000 (plus a little interest). But you won’t be able to buy the same things with it. Not even close.
That’s not a guess. That’s purchasing power, and it’s the concept that makes sense of why saving alone isn’t enough.
What purchasing power means
Purchasing power is simple: how much stuff can your money actually buy?
If a basket of groceries costs €100 today and €110 next year, your purchasing power has dropped by roughly 10%, even though your bank balance hasn’t changed at all.
The number on your account is the nominal value. What that number can buy is the real value. They’re different, and the gap only grows over time.
The force behind it: Inflation
The reason purchasing power declines is inflation: the general increase in prices over time.
When inflation is 3%, something that costs €100 today will cost €103 next year. Central banks target a low, steady rate, around 2% in the eurozone. A little inflation is considered normal and even healthy for the economy. The problem is what it does to your money over long periods.
Inflation is easy to ignore because it doesn’t take money away from you visibly. Your bank balance stays the same. The number on the screen hasn’t changed. But what that number can buy has quietly shrunk.
A concrete example
Imagine you put €10,000 under your mattress and leave it there for twenty years. The number on the cash never changes. But here’s what happens to what it can buy at a steady 2.5% inflation rate:
| Year | Nominal Amount | What It Buys (Approx.) |
|---|---|---|
| Today | €10,000 | €10,000 worth of goods |
| In 10 years | €10,000 | ~€7,800 worth of goods |
| In 20 years | €10,000 | ~€6,100 worth of goods |
You lost nearly 40% of your purchasing power without spending a cent. The money was sitting still, but prices were moving. (Real eurozone inflation has run uneven over the last twenty years, with long stretches near 1% and a sharp burst in 2022 and 2023; 2.5% is used here as an illustrative steady-state, not as a forecast.)
Even in a savings account, the erosion continues. Consider €10,000 earning 0.5% interest, with inflation at 2.5%:
| Year | Nominal Value | Real Purchasing Power |
|---|---|---|
| Today | €10,000 | €10,000 |
| 10 years | €10,511 | €8,211 |
| 20 years | €11,049 | €6,743 |
| 30 years | €11,614 | €5,537 |
The number went up. The value went down. You gained over €1,600 in interest but lost over €4,400 in purchasing power.
The real return: what actually matters
When you put money in a savings account earning 1%, and prices rise 2.5%, you didn’t gain 1%. You lost 1.5%.
Real Return = Nominal Return - Inflation
| Where your money is | Nominal return | Inflation | Real return |
|---|---|---|---|
| Cash under mattress | 0% | 2.5% | -2.5% |
| Savings account | 1% | 2.5% | -1.5% |
| High-yield savings | 3% | 2.5% | +0.5% |
| Stock market (long-run avg, varies widely) | 7% | 2.5% | +4.5% |
A negative real return means you’re getting poorer on paper, even as your account balance grows. This is why understanding purchasing power changes every financial decision you make.
How inflation interacts with your finances
Savings: Cash sitting in a low-interest account is practically guaranteed to lose value over time. If your savings account’s interest rate is below inflation, you’re going backward in real terms.
Debt: Inflation actually helps borrowers. If you owe a fixed amount and inflation rises, you’re repaying with money that’s worth less. Your salary may increase with inflation, but your debt doesn’t. This is one of the few times inflation works in your favor.
Investments: Stocks, real estate, and other assets that tend to grow over time can outpace inflation. That’s one of the main reasons people invest instead of just saving.
Emergency fund: Even your safety net loses purchasing power. A fund that covers six months of expenses today might only cover four months in ten years. You need to revisit it periodically.
What this means in practice
- Think in real terms. When you see an interest rate, a return, or a salary increase, subtract inflation. That’s the number that actually matters
- Idle cash has a cost. Beyond an emergency fund, money that earns less than inflation loses value in real terms. How much cash is “idle” depends on your upcoming needs
- Growth assets are the usual answer, with trade-offs. Over the long term, broad stock market investments have historically returned around 4-6% a year after inflation across major developed markets, thanks to compound interest. That is why many people invest money they won’t need for years, accepting that values can fall sharply along the way
- Plans need revisiting. Prices change. An emergency fund, a salary and a savings rate all drift, so it helps to check them periodically.
Understanding purchasing power, and the inflation that erodes it is the key to understanding why standing still financially is actually moving backward.
But purchasing power doesn’t just change over time. It also changes across borders. The same salary buys very different lives in different countries. In the next post, we’ll look at exchange rates and purchasing power parity, and why your euro stretches further in some places than others.