Banking and Personal Finance Review for Students Practice Test

The goal is earning a return that exceeds inflation so the purchasing power of your savings grows over time. Inflation raises the prices of goods and services, so money saved without beating inflation loses value in real terms. If returns match inflation, your purchasing power stays the same but you don’t grow your wealth. If returns are below inflation, you actually lose purchasing power. When savings earn a rate higher than inflation, you gain real purchasing power. For example, with 3% inflation, a 2% return leaves you with a -1% real return, while a 4% return gives you a +1% real return. Balancing the desire for a higher return with acceptable risk and your time horizon is essential.