Why the Cash in Your Bank Account Shrinks Even While It Just Sits There — How Inflation Works

You have 10 million KRW in your bank account. A year later, the balance is still exactly 10 million KRW. Since you haven't lost any money, it's easy to feel safe. But if prices rose 3% over that same period, then what you could buy with 10 million KRW last year now requires 10.3 million KRW. The number is unchanged, but 'how much you can buy' has shrunk. This is how inflation quietly eats away at cash.

The key isn't your 'balance,' it's 'purchasing power'

The real value of money should be measured not by the number printed in your account, but by what and how much you can buy with it — in other words, by purchasing power. Inflation is the phenomenon of prices rising broadly, and prices rising means exactly the same thing as the amount you can buy with the same money shrinking. So if you simply hold cash, even though the nominal amount doesn't change, its real value is shaved down each year by the rate of inflation.

Cash may not be a 'safe asset,' but rather an asset that slowly leaks value.

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

The concept that captures this in a single line is the real interest rate. The formula is simple: real interest rate ≈ nominal interest rate − inflation rate. For example, if you put money in a fixed deposit paying 3.0% a year but prices rose 3.5%, the real interest rate is 3.0 − 3.5 = −0.5%. It means that even though you received interest, in terms of purchasing power you're actually in the negative — that is, you lost money. Conversely, with a deposit rate of 3.5% and inflation of 2.0%, the real interest rate is +1.5%, and only then does your money 'truly' grow.

Use the Rule of 72 in reverse and you'll see a 'cut-in-half clock'

The Rule of 72 (72 ÷ rate = the number of years to double), a quick way to estimate compound growth, applies to inflation just the same. If prices rise 3% every year, then 72 ÷ 3 = 24, meaning prices double in about 24 years. Flipped around, that means the purchasing power of cash is halved in 24 years. If the inflation rate rises to 6%, purchasing power is cut in half in just 72 ÷ 6 = 12 years. The higher the inflation, the faster cash melts away.

What happens to 10 million KRW left untouched for 10 years (by the numbers)

Suppose you leave 10 million KRW in cash in a drawer for 10 years without a single won of interest, and assume an average annual inflation rate of 3%. Purchasing power shrinks by a factor of 0.97 each year (1 ÷ 1.03). After 10 years, the real purchasing power is about 10 million KRW × (1/1.03)^10 ≈ 7.44 million KRW. The balance is still 10 million KRW, but what you can buy has shrunk to roughly 7.44 million KRW worth. About 2.56 million KRW worth of purchasing power has quietly vanished.

• 2% inflation · 10 years → 10 million KRW's purchasing power becomes about 8.2 million KRW (−18%)
• 3% inflation · 10 years → about 7.44 million KRW (−26%)
• 5% inflation · 10 years → about 6.14 million KRW (−39%)
• → The higher the inflation rate and the longer you let it sit, the more steeply the loss grows

So is cash useless? — It just has a different role

This isn't to say cash is bad. Emergency funds and short-term living expenses must not fluctuate in value, so keeping them in cash and deposits is the right call. But if you keep even 'money you won't use for several years' entirely in cash, it's fully exposed to inflation. The key is to divide your money into separate buckets by purpose. It's a matter of asset allocation: protect the money you'll use right away, and place the money you'll park for a long time somewhere that can beat inflation.

Buckets for protecting purchasing power (for reference)

1. Emergency and short-term funds: deposits and parking accounts — the deposit protection limit is 50 million KRW each at commercial banks and savings banks (principal + interest combined), and it was raised to 100 million KRW starting September 2025. The goal is 'not losing,' even if it can't beat inflation
2. Fill tax-advantaged accounts first: pension savings + IRP together qualify for a tax deduction on up to 9 million KRW a year (16.5% for total salary of 55 million KRW or below, 13.2% above) — filling 9 million KRW returns up to 1.485 million KRW, which is essentially close to a guaranteed return
3. ISA: tax-free up to 2 million KRW (4 million KRW for the low-income type), with the excess taxed separately at 9.9% — it reduces tax leakage and raises your real rate of return
4. Long-term, diversified investing: don't pile into a single stock or a single country; spread across multiple assets to lower volatility — aim to keep pace with prices over the long run
5. Your own home and housing subscription: building up housing-subscription eligibility through a comprehensive housing-subscription savings account is also one way to hedge with real assets that are linked to prices over the long term

You can't stop inflation, but you can decide where to put your money.

To sum up, leaving cash to just sit there is not a choice where 'nothing happens' — it's a choice to surrender purchasing power each year by the rate of inflation. Instead of the balance number, reckon by the real interest rate (nominal interest rate − inflation rate), use the Rule of 72 to gauge whether time is on your side or against you, and then divide your money into buckets by purpose. That said, this article is reference information for understanding how inflation works and does not recommend or guarantee the purchase or sale of any specific product or any returns. Tax rules, limits, and interest rates vary by timing and individual circumstances, so be sure to check the latest information before acting.