The Inflation Trap
Bank savings and fixed deposits feel safe, but rising prices and taxes on interest quietly eat away at what your cash can actually buy over the long run.
The inflation tax has a fantastic ability to simply consume capital.
Why R100 Doesn't Feel Like R100 Anymore
Over time, everyday life quietly gets more expensive. Groceries, rent, medical aid, and fuel creep up every year. This invisible drain is called inflation.
The items aren't getting bigger or better. The rand in your pocket is simply losing its buying power.
The same R100 (Big Macs)
2000
Bought 11 burgers (R9 each).
2026
Buys fewer than 2 (R56.90 each).
The same R500 (Fuel)
2000
Bought about 3 full tanks (~R3.37/litre; ~R169 for a 50L tank).
2026
Buys about one-third of a tank (~R30.25/litre; ~R1 513 for a 50L tank).
(Big Mac prices from The Economist Big Mac Index. Fuel based on inland 50-litre tank prices).
What This Means for Cash Savings
Cash in the bank is essential for emergencies and money you need in the next 1 to 3 years. But over long periods (10 to 20 years), leaving long-term wealth purely in cash brings two quiet headwinds:
SARS takes a cut
Interest is taxed as income at your personal tax rate (18% to 45%). If you are under 65, SARS gives you an annual interest tax exemption of R23 800. Any interest earned above that gets taxed.
Inflation eats the rest
If a money market fund earns 7% interest and SARS taxes that return at 31%, you are left with about 4.8%. If inflation runs at 5% to 6%, your purchasing power shrinks every year.
On paper, your bank balance goes up. In reality, you walk out of the shop with less in your trolley.
How Long-Term Investors Beat Inflation
To outpace inflation over decades, investors typically put long-term money into productive assets—like company shares (equities).
Unlike a bank account with a fixed interest rate, growing companies can raise their prices as everyday costs rise, protecting their profits.
In my view, for most people, the best thing to do is to own the S&P 500 index fund. Consistently buy an S&P 500 low-cost index fund. Keep buying it through thick and thin, and especially through thin.
Example: The S&P 500 Top 10
Instead of trying to pick single winning shares, an index fund holds hundreds of the largest businesses all at once, such as:
- Microsoft
- Apple
- NVIDIA
- Amazon
- Alphabet
- Meta
- Berkshire Hathaway
- Tesla
- Broadcom
- Eli Lilly
In South Africa, investors access these global companies directly through low-cost index-tracking ETFs (like funds tracking the S&P 500), owning a piece of the world's largest businesses at very low running fees.