What are inflation erodes real returns?

Inflation erodes real returns when the money you save or earn doesn’t keep up with how much things cost.

Imagine you have a piggy bank full of coins. Every year, your parents give you 10 coins to put in it. At first, those 10 coins feel like a lot, they can buy a big candy bar! But over time, the price of that candy bar goes up. One day, it costs 15 coins instead of 10. Even though your piggy bank is growing, you’re getting fewer candies than before because the cost went up faster than the number of coins you got.

Think of inflation like a growing candy bar, it gets bigger every year. If your money doesn’t grow as fast as the candy bar, you end up with less real value. It’s like you're saving up for a treat, but the treat keeps getting more expensive.

So even if you’re earning or saving money, if prices go up too fast, your real returns, how much your money can actually buy, get smaller. That’s why it's important to make sure your savings grow along with the cost of living.