Nobody sends you a bill for inflation. It arrives as prices that creep up while a sum of money stays the same size. That is why the book calls it a quiet tax.
The arithmetic
At 3% inflation a year, something that costs $1,000 today costs about $1,806 in 20 years. Turn it around: $1,000 held in cash for 20 years will buy what about $554 buys today.
$1,000 ÷ (1.03)^20 ≈ $554
Almost 45% of its purchasing power is gone, without a single fee or withdrawal.
Real return is what counts
If your savings earn 4% while prices rise 3%, your money grew by only about 1% in real terms. A return that looks healthy can be close to zero once inflation is taken out. A return below inflation is a loss, even though the balance on the statement keeps rising.
What this changes
- Cash has a job. It is excellent for emergencies and near-term bills, and a poor place for money you will not touch for decades.
- Compare real, not nominal. When you see a rate, subtract the inflation you expect.
- Time magnifies it. Small gaps become large ones over 20 or 30 years, in both directions.
The quiet tax tool lets you set the amount, the years and the inflation rate, and shows nominal and real values side by side. The idea is introduced in Chapter 2 and returns throughout the book.
Illustrative figures using a constant 3% inflation rate. Actual inflation varies by country and year; this is general education, not personal advice.
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The quiet tax
Want the checklists that go with this? Checklists, questions and worksheets inspired by the book, for the next time money is on the table. Part of the Reader’s Letter: a few times a year, never more.
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General information and education only, not personal financial, tax, legal or investment advice. Figures are illustrative and use simplified assumptions.