Why Cash in Your Bank Account Shrinks Even When It Sits Still — How Inflation Works

You have KRW 10 million in your bank account. One year later, the balance is still KRW 10 million. Since you have not lost any money, it is easy to feel safe. But if prices rose by 3% over the same period, the goods you could buy last year for KRW 10 million would require KRW 10.3 million this year. The number is unchanged, but the amount you can buy has decreased. This is how inflation quietly eats away at cash.

The key is not the “balance,” but “purchasing power”

The true value of money should be measured not by the number printed in your bank account, but by what and how much that money can buy: its purchasing power. Inflation is a broad rise in prices, and rising prices mean exactly the same thing as being able to buy less with the same money. So if you simply hold cash, the nominal amount may not change, but its real value is reduced each year by the inflation rate.

Real interest rate: the formula for checking whether your money is truly growing

The concept that captures this in one line is the real interest rate. The formula is simple: real interest rate ≈ nominal interest rate − inflation rate. For example, if you put money into a one-year time deposit paying 3.0% while prices rise by 3.5%, the real interest rate is 3.0 − 3.5 = −0.5%. Even though you received interest, you are actually in negative territory in terms of purchasing power, which means a loss. Conversely, if the deposit rate is 3.5% and inflation is 2.0%, the real interest rate is +1.5%, and only then is your money “truly” growing.

Use the Rule of 72 in reverse to see the “halving clock”

The Rule of 72, a quick way to estimate compound growth (72 ÷ rate = years until doubling), applies to inflation as well. If prices rise by 3% every year, 72 ÷ 3 = 24, meaning prices roughly double after about 24 years. Put the other way around, the purchasing power of cash is cut in half in 24 years. If inflation rises to 6%, then 72 ÷ 6 = 12 years until purchasing power is halved. The higher inflation is, the faster cash melts away.

What happens if you leave KRW 10 million untouched for 10 years? (By the numbers)

Assume you keep KRW 10 million in cash in a drawer for 10 years without earning a single won of interest, and set the average annual inflation rate at 3%. Purchasing power falls to 0.97 times its previous level each year (1 ÷ 1.03). After 10 years, the real purchasing power is about KRW 10 million × (1/1.03)^10 ≈ KRW 7.44 million. The balance is still KRW 10 million, but what you can buy has shrunk to about KRW 7.44 million worth. About KRW 2.56 million of purchasing power has quietly disappeared.

• 2% annual inflation · 10 years → purchasing power of KRW 10 million becomes about KRW 8.2 million (−18%)
• 3% annual inflation · 10 years → about KRW 7.44 million (−26%)
• 5% annual inflation · 10 years → about KRW 6.14 million (−39%)
• → The higher the inflation rate and the longer the money sits, the more sharply the loss grows

So is cash useless? No, it just has a different role

This does not mean cash is bad. Emergency funds and short-term living expenses should not fluctuate in value, so keeping them in cash or deposits makes sense. But if even the money you will not use for several years is kept entirely in cash, it is fully exposed to inflation. The key is to separate your money into different containers according to its purpose. It is a matter of asset allocation: protect the money you need soon, and place money you can leave for a long time where it has a chance to beat inflation.

Containers that help protect purchasing power (for reference)

1. Emergency funds and short-term money: deposits and parking accounts — for products covered by deposit protection, check the KRW 100 million limit per person and per financial institution for principal plus interest. The purpose is not to beat inflation, but to avoid losing money you need soon
2. Fill tax-advantaged accounts first: pension savings + IRP offer tax credits on combined annual contributions up to KRW 9 million (16.5% for total salary of KRW 55 million or less, 13.2% above that) — contributing the full KRW 9 million can provide a tax credit effect of up to about KRW 1.485 million
3. ISA: tax-free up to KRW 2 million for the general type (KRW 4 million for the low-income type), with excess gains separately taxed at 9.9% — reducing tax leakage helps raise real returns
4. Long-term, diversified investing: do not concentrate in one stock or one country; spread money across multiple assets to reduce volatility — the aim is to keep pace with inflation over the long run
5. Home ownership and housing subscription: building eligibility through a comprehensive housing subscription savings account can also be one way to prepare for real assets that tend to move with inflation over the long term

In short, leaving cash untouched is not a choice where “nothing happens.” It is a choice to give up purchasing power each year by the inflation rate. Instead of looking only at the balance, evaluate money using the real interest rate (nominal interest rate − inflation rate), use the Rule of 72 to judge whether time is on your side or against you, and divide your money into containers by purpose. This article is reference information for understanding how inflation works and does not recommend or guarantee the purchase, sale, or return of any specific product. Tax rules, limits, and interest rates vary by timing and personal circumstances, so be sure to check the latest information before taking action.