Guide Personal finance
How inflation hits your money differently depending on where you keep it
Inflation is not one thing happening to your money. It is four different things, decided by which of four places the money is in, and in one of them it works for you.
By NOUQUD Editorial Room4 min readUpdated
Where your money sits decides what inflation does to it
The same 10,000 loses 2,487, loses 1,549, holds, or gains you 2,487, depending on which of four places it is in.
Your money is never in one place. Some of it is coming in (earnings, your salary), some is sitting in an account, some is in things you own, and some of it is money you owe. Three years at 10% a year does something different to each.
The same sum in four places, 3 years at 10% Plays on its own
10,000 in each of four places: your salary, your account, something you own, and something you owe. The dashed line is that sum, and every column is measured against it.
The number on your payslip did not move, so it buys what 7,513 used to. You are 2,487 worse off.
Your account at 4% did go up as a number, and it buys what 8,451 used to. You are 1,549 worse off.
The thing you own repriced with everything else, so it is still worth 10,000. It reaches the line exactly: you neither lost nor gained.
The debt is still 10,000, but paying it now costs you what 7,513 used to. The column falls exactly as the first one did, and here the fall is 2,487 in your favour.
- WHAT COMES IN
- Worth 7,513 in today's prices, a loss of 2,487.
- WHAT SITS STILL
- Worth 8,451 in today's prices, a loss of 1,549.
- WHAT YOU OWN
- Worth 10,000, which is the sum it started as.
- WHAT YOU OWE
- Worth 7,513 in today's prices, a gain of 2,487.
Three of the four move against you. The fourth moves for you, and almost nobody counts it.
The rest of this guide takes each place in turn. The first three figures draw the same price line — what the same basket costs, year by year — and ask whether that place keeps up with it.
What comes in
A salary that does not beat TermInflationالتضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term is a pay cut, however large the raise looks.
One salary, three cases, 3 years at 10% Plays on its own
The price line is what things cost. A basket at 10,000 today costs 13,310 after 3 years.
Case one: no raise. The salary stays at 10,000 and prices walk away from it. After 3 years it buys what 7,513 used to.
Case two: 5% a year. The salary reaches 11,576, a bigger number that is still under the line.
Case three: 15% a year. It reaches 15,209 and clears the line. The raise that keeps you exactly level is 10%, which is the inflation rate itself.
- WHAT THINGS COST
- The same basket each year at 10%. It is the line a salary has to clear.
- NO RAISE
- The number on the payslip does not move, so the whole of the price rise lands on it.
- RAISE OF 5%
- The number on the payslip rises 5% a year, still under the line.
- RAISE OF 15%
- Above 10%, so it clears the line.
At 10% the raise that leaves you exactly where you were is 10%. Below it you are poorer and the payslip says otherwise, which is why the number to walk into the review with is the inflation rate rather than last year’s raise. What a specific raise is worth once prices are taken out is a guide of its own: what your raise is actually worth.
What sits still
An account beats inflation or it does not, and the line between the two is the inflation rate.
One balance, three cases, 3 years at 10% Plays on its own
The same line: a basket at 10,000 today costs 13,310 after 3 years.
Case one: cash. The number never moves, so it ends up buying what 7,513 used to. Leaving money still is a decision with a price.
Case two: an account at 4%. The balance reaches 11,249, a bigger number that is still under the line: it buys what 8,451 used to.
Case three: an account at 14%. It reaches 14,815 and clears the line, buying what 11,131 used to. The dividing line is 10%, the inflation rate itself.
- WHAT THINGS COST
- The same line in every figure here. Any balance under it is losing, however much its number went up.
- CASH
- The number is fixed, so it takes the whole of the price rise. That is a decision, not the absence of one.
- AN ACCOUNT AT 4%
- The balance grows 4% a year, a slower loss than cash.
- AN ACCOUNT AT 14%
- Above inflation, so it genuinely gains. Accounts like it exist, and the comparison that finds one is with the line rather than with the account next door.
Cash is the case people do not think of as a decision. It is one, and over three years it costs 2,487 on 10,000. The 4% account is the harder case, because the balance genuinely rose: 11,249 is more than 10,000 and it buys less. The 14% account is the one that works, and finding it is a matter of comparing the rate with the price line rather than with the account next door. That comparison is the real return guide.
What you own
The protection is in the thing, not in owning it.
Three things you own, 3 years at 10% Plays on its own
The same line again: 10,000 today becomes 13,310 after 3 years.
Something priced in the same market. It rises with everything else, so it sits on the line and holds its value. That is the whole of the protection.
Something that wears out. Its price rises and it ages at the same time, so it falls behind the line: it is worth what 6,141 used to be.
Something priced somewhere else. It does not follow local prices at all, so it stays at 10,000 and loses exactly as cash does. The protection is in the thing, not in owning it.
- WHAT THINGS COST
- The line a thing has to keep up with to hold its value.
- TRACKS PRICES
- It sits on the line. It holds its value, and you did not choose that.
- WEARS OUT
- Its price rises and it ages at the same time, so it loses slowly.
- PRICED ELSEWHERE
- It does not follow local prices at all, so it loses exactly as cash does.
One of those three held its value, and you did not choose which. A price set in the same market as other prices moves with them; a price set somewhere else does not; and a thing that wears out is ageing on one side while prices lift it on the other.
There is a second catch that no figure shows. The protection arrives on the thing’s schedule rather than yours: it is worth what it is worth on the day you need to sell it, which is not usually the day you would have picked.
What you owe
A fixed debt is the one place inflation works for you: the number does not move, so paying it gets cheaper.
What paying off a fixed debt costs you, 3 years at 10% Plays on its own
You owe 10,000 at a fixed rate. Today, paying it costs you exactly 10,000.
A year passes and prices rise 10%. The number you owe is the same number. Handing it over now costs you what 9,091 used to.
After 3 years it costs you what 7,513 used to. The debt shrank by 2,487 and you paid nothing for that.
None of it happens to a debt that reprices. A floating rate lifts the amount with prices, so what it costs you stays at 10,000. And the gain in the first case only lands if what comes in rose too.
- AT A FIXED RATE
- The number in the contract does not move with prices, so what paying it costs you falls.
- IT REPRICES
- A floating rate lifts the amount with prices, so the burden stays where it was.
This figure measures something different from the three above it. Not the amount owed, which never changes, but what handing that amount over costs you — and that is the number a borrower actually feels.
Two conditions, and both matter. The rate has to be fixed, because a floating one reprices with inflation and the gain never arrives. And what comes in has to have risen, because the debt is repaid out of income; if your salary stayed at 10,000 you are paying the same number out of money that buys less, and the two cancel.
This is not an argument for borrowing. It is the reason the same three years that made you poorer in three places made you better off in one, and why the four have to be counted on one page rather than one at a time.
What to do
Count all four, because three of them are quiet and the fourth is invisible.
Ask what your raise has to be, not what it is. At 10% the number that keeps you level is 10%, and a raise of 5% a year over three years leaves you buying what 8,697 used to buy.
Judge a savings rate against the price line. Four per cent turned 10,000 into a balance of 11,249 that buys what 8,451 used to. Fourteen per cent turned it into 14,815 that buys what 11,131 used to. The rate is the whole difference.
Do not treat what you own as a plan. One of the three things held its value because of how it is priced, not because you own it.
Count the debt on the same page as the rest. Paying off a fixed 10,000 got 2,487 cheaper over the three years, and it is the only line of the four in your favour.
Common questions
Does inflation do the same thing to everything I have?
What raise do I need just to stand still?
Can a savings account actually beat inflation?
How does inflation help someone in debt?
Does owning things protect me from inflation?
Sources
Published Updated Last reviewed Our methodology
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