Savings Goals and Inflation: Planning Money That Keeps Its Value

A savings goal needs three things: a target, a date and a monthly amount. Inflation is why the target should creep up over the years.

Two ways to plan

• Fix the monthly amount and find the time. Saving 400 a month toward 20,000 from a start of 2,000 takes about 3 years with a little interest.
• Fix the date and find the monthly amount. The Savings Goal Calculator shows what to put away each month, and a yearly table of what you paid in and the interest earned.

Let interest help

Interest earns interest, as explained in the guide on compound interest. Even a modest rate shortens the time a little, and the earlier you start, the more it helps. A common suggestion is to keep an emergency fund of three to six months of living costs before saving for other goals.

What inflation does

Inflation is the rise in prices over time. At 3 percent a year, something that costs 100 today costs about 134 in ten years, and 100 saved today will only buy what about 74 buys now. The Inflation Calculator shows future prices, buying power, and the yearly rate hidden between two prices.

Real return

Your return after inflation is what counts. A 7 percent return with 3 percent inflation is about 3.9 percent in real terms, a little less than the simple difference of 4. Money in an account that pays less than inflation loses buying power even as the balance grows.

Putting it into practice

• Set up an automatic transfer on payday, so saving happens first.
• Raise your target each year to keep up with prices.
• Use the Compound Interest Calculator for long-term projections with regular deposits.
• These tools give estimates, not financial advice, and returns are never guaranteed.