Some people save for real, and some just nominally.
People who save for real are mindful of inflation. You think your money is safe in your bank account? It’s earning interest, you tell yourself. Sure it is, but how much interest, exactly? And what’s inflation at? You need these things to calculate your real savings.
Inflation measures how much prices are going up. If inflation rose at 2% (which it has been annually on average for awhile now), then that means prices are up 2%. It also means your salary (which hasn’t changed in the past year) is giving you less buying-power than before. The prices of everything around you are going up, and yet your paycheck is staying the same. So you can buy...less.
The same applies to your savings account. If your savings account is only giving you 1% interest per year (APY) and inflation is rising at 2% per year, then your real savings are going down by 1% each year. Your money is eroding away...and you don’t even know it. Well, now you do. The average APY on savings accounts in 0.09% according to the FDIC, so...yeah. Everyone’s money is eroding away if it’s not keeping up with inflation.
Think about it this way: Grandma Ethel kept $100 in her savings account with 1% interest starting in 1959, and never added or took out any money. Between 1959 and 2019, that $100 dollars grew to $181.67
Back in 1959, $100 could buy you 200 movie tickets. Grandma Ethel could’ve watched 200 movies with that money. Today, her $181.67 could now only buy her 20 movie tickets. Movie ticket prices went up from an average of 50 cents to just over $9. Even though her savings were earning interest, prices were rising much faster.
In macroeconomics, real savings matters, too. Keynes’ famous IS-LM model, where S is savings, can be done in real (rather than nominal) terms to compare results across time.
Now go check your bank account APY, and find one that’s at least 2%. Oh, and one for Grandma Ethel, too.
Related or Semi-related Video
Finance: What Is a Real Return?67 Views
finance- a la shmoop. what is a real return? like is there a fake return? you
know like the news? well kinda .real return refers to an [man frowns talking to camera]
investment return mapped against inflation. so let's say you invest in a
bond that pays five percent a year for ten years and then pays you back your
principal .boring but nice- you know like a good doctor visit. your nominal return
over that period was 5% but since inflation was 3% a year during that
period on average your real return was only 2% a year- meaning that the
performance of your investment only eked out a 2% net gain against the price of [equation]
milk gas and you know knocked off iPhones. so don't be a chump who thinks
that they're making more money than they really are, and you know keep on keeping
it real. [man sitting in chair, talks to camera]
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