Can anybody explain to me how exactly does inflation erodes away bank savings using the time value concept of money?

  • @Alex explains mechanically how inflation affects you. Does that answer your question? Or are you asking why $100 today doesn't have the same value as $100 100 years ago. Nov 9 '14 at 5:09

Suppose you have $100 today and suppose that hamburgers cost $5.

If you are holding $100, you could buy 20 hamburgers at $5 each.

Now suppose you take that $100 and stuff it under your mattress for 24 years.

When you pull out your money, you still have $100, but it turns out hamburgers now cost $10. The increase from $5 to $10 is inflation. Your savings of $100 was "eroded" by half even though before and after you had $100 and now you can only buy 10 hamburgers instead of 20 hamburgers.

Suppose inflation is 3%. That means that if you earn 3% return on your investments, you'll stay even with inflation (If you can buy 20 hamburgers today, then at any point you can still buy 20 hamburgers).

If you want your money to grow in a real, tangible way you'll want to seek returns that beat the rate of inflation.

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