Understanding Inflation
Inflation is the rate at which prices rise over time. At 3% annual inflation, something costing $100 today will cost $181 in 20 years. Your $100 sitting in a non-interest-bearing account will only buy $55 worth of goods in 20 years.
Protecting Against Inflation
To maintain purchasing power, your investments must grow faster than inflation. A 7% investment return with 3% inflation gives a 4% real return. Stocks historically outpace inflation. TIPS (Treasury Inflation-Protected Securities) provide guaranteed inflation protection.