In 20 years, a single dollar saved today could be worth $3.56 in nominal value or $1.97 in real value, assuming it is invested in a taxable account.
Understanding the Future Value of Your Dollar
When considering how much money will be worth in the future, it's crucial to distinguish between its nominal value and its real value. Both provide important insights for financial planning, but they tell different stories about purchasing power.
- Nominal Value: This refers to the face value of your money without accounting for inflation. It's the numerical amount you will see in your account or receive.
- Real Value: This represents the purchasing power of your money, adjusted for inflation. It tells you what your money can actually buy in the future compared to what it can buy today. Inflation erodes purchasing power, so the real value is often less than the nominal value.
Projected Value of $1 After 20 Years
Based on typical growth scenarios for a dollar invested in a taxable account, the projected values are as follows:
| After # Years | Nominal Value | Real Value |
|---|---|---|
| 20 | $3.56 | $1.97 |
Why Nominal and Real Values Matter
Understanding both nominal and real values is essential for making informed financial decisions:
- Financial Goals: If your goal is to save for a specific future purchase, like a car or a down payment on a house, understanding the real value helps you estimate how much purchasing power your savings will actually have.
- Retirement Planning: For long-term goals such as retirement, the real value of your savings is paramount. It dictates your future standard of living and ensures you can afford daily expenses even with rising costs.
- Investment Strategy: Knowing the difference helps you evaluate the true return on your investments. An investment might show a high nominal return, but if inflation is also high, your real return—and thus your increase in purchasing power—could be much lower.
By considering both aspects, you gain a comprehensive view of your money's future potential and can plan more effectively to achieve your financial objectives.
