Why Does Money Lose Value in a Bank Account?
Understand how holding money in a bank can lead to a loss of purchasing power. Explore the key financial dynamics at work.
Many individuals wonder if simply holding money in a bank account is enough to preserve its value over time. While bank accounts offer a secure place for funds, several factors can gradually diminish the value of that money. Understanding these influences is important for financial well-being.
Understanding Inflation and Purchasing Power
Inflation is the rate at which the general level of prices for goods and services rises, causing currency’s purchasing power to decline. This means each unit of currency buys fewer goods and services than before. Even if the numerical amount in a bank account remains the same, its ability to purchase items decreases over time.
The Consumer Price Index (CPI) is a common measure used to track inflation, reflecting the average change in prices paid by consumers for goods and services. For example, if inflation is 3%, what cost $100 today would cost $103 a year from now. The $100 held in a bank account would then effectively buy 3% less. This erosion of purchasing power is how money loses value when simply held in a bank.
Interest Rates and Their Relation to Inflation
Banks typically pay interest on deposits in savings and checking accounts, which can help offset some value lost to inflation. However, these interest rates are often quite low. For instance, the national average interest rate for savings accounts was around 0.38% as of July 2025, and for checking accounts, it was even lower at 0.07%. Many large national banks offer rates as low as 0.01% on basic savings accounts.
If the interest rate earned on a bank account is lower than the inflation rate, the money still loses purchasing power in real terms. This concept is known as the “real return” versus the “nominal return.” The nominal return is the stated interest rate, while the real return is the nominal rate adjusted for inflation. For example, if an account earns 0.38% interest but inflation is 2.7%, the real return is negative, meaning the money’s buying power decreases.
Other Factors Affecting Account Balances
Beyond inflation, bank fees can directly reduce an account’s numerical balance. Monthly service fees are common and can range from $5 to $25 per month.
Overdraft fees are incurred when a transaction exceeds the available balance. These fees range from $30 to $35 per occurrence, and some banks may charge additional daily fees if the account remains overdrawn. Inactivity fees may be charged if an account has no transactions for a specified period, ranging from a few months to a year, with fees between $5 and $20 per month.
Distinguishing Deposit Security from Value Preservation
The Federal Deposit Insurance Corporation (FDIC) safeguards money held in bank accounts. The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each ownership category. This insurance protects the nominal dollar amount in an account against the risk of bank failure.
However, FDIC insurance does not protect against the loss of purchasing power due to inflation. While it guarantees the recovery of the deposited dollar amount, it does not guarantee those dollars will retain their initial buying power. Therefore, while deposit security is maintained, the real value of money can still diminish over time if inflation outpaces any interest earned.