What is Inflation? Why your Savings can Lose Value Over Time

Key takeaways

Inflation eats away at your purchasing power: A bigger balance doesn’t count for much if prices outpace your growth.
Real interest rates are the true North: Your bank deposits only gain value when your savings rate outruns inflation.
Savings offer security, but disciplined investing builds wealth: Cash gives you peace of mind today; a disciplined strategy protects your future.
The Bottom Line: Don’t stand still while your money loses value, but don’t rush into the market out of fear. Start by laying a solid foundation with an emergency fund.

A Quick Explanation Using a “Bowl of Pho” Example

Inflation is the increase in the general price level over time. Put simply: 100,000 VND today is worth more than 100,000 VND a few years from now.

Let’s look at a practical example in Vietnam:

2016: With 100,000 VND you could buy nearly 3 bowls of pho (around 35,000 VND per bowl).
2026: With the same 100,000 VND, you can only buy 1 bowl of pho (prices have risen to around 70,000–80,000 VND per bowl) and have some loose change left, not enough for a second bowl.

The bowl of pho hasn’t changed, but the quantity you can buy has fallen. That is how inflation quietly “eats away” at your money’s purchasing power.

Why Can Savings Still “Lose Value”? It’s About Purchasing Power

To answer the question “does saving lose value?”, you need to distinguish between:

Nominal value: The balance shown in your banking app.
Purchasing power: The amount of goods you can actually buy with that money.

When prices rise faster than your bank interest rate, you may see more money in your account but be able to buy less in real life. This is why many people start asking: is saving enough for long-term goals?

Saving is still essential for:

An emergency fund
Short-term goals (under 1 year)
Peace of mind

However, if you rely solely on savings for goals 5–10 years away, inflation becomes your biggest risk.

What Is the Real Interest Rate? Example with 10 Million VND

Here is a simple formula you can use to check your own situation and understand what a real interest rate is:

Real interest rate = Savings interest rate – Inflation rate

Practical example with 10,000,000 VND:

Savings at 5% per year: After 1 year, you have 10.5 million VND.
Inflation at 6% per year: An item that cost 10 million VND last year now costs 10.6 million VND.

Result: You earned 500,000 VND in interest, but you are still 100,000 VND short of buying the same item. The money didn’t disappear, its purchasing power shrank.

Two Mistakes to Avoid: “Standing Still” and “Going All In”

The “standing still” trap: Holding all your money in cash because you fear risk. Over the long term, purchasing power is guaranteed to erode.

The “all-in” trap: Being so afraid of inflation that you put all your money into high-risk investments without knowledge. This is the fastest way to lose money due to panic during market volatility.

A safer approach is to separate money by time horizon:

Short term: Prioritize savings for safety and flexibility.
Long term: Choose disciplined growth plans such as stocks or ETFs, aligned with your risk tolerance.

A 4-Step Plan to Stop Your Money “Evaporating”

You cannot stop inflation, but you can protect your money from inflation through your actions:

Build an emergency fund first: Keep 3–6 months of living expenses in a safe, accessible place (such as a bank deposit).
Invest only surplus money: Use only money you are certain you will not need for the next 3–5 years.
Start small: For example, 500,000 VND per month to build habits and strengthen your psychology.
Think ownership: Shift from simply holding VND to owning shares in leading global companies through teko.

The Next Step

Understanding purchasing power is the first milestone of financial maturity. Next, shift your perspective from being a "consumer" to being an "owner."

Read more: [Speculation vs. Long-Term Investing: Which is Better?]