Do I need an emergency fund?

emergency fund that goes into bags

I bet some of you thought “An Emergency Fund? Whaaaat?” when you read the title. I did as well when I heard this for the first time. But let me tell you why it actually is important. 

An emergency fund is money that is saved for unexpected life events and for the peace of your mind. 

This article is also available in German : Brauche ich einen Notfall-Fond?

The reason why this is important is that saving money is already hard as it is, I mean I struggle as well. Without an emergency fund, you basically don’t have a stable base to stand on. 

According to a 2018 report, an CHF 400 emergency would send 40% of Americans into debt. This is a lot more people than I expected. 40% of Americans don’t even have CHF 400 on the side, so if anything happens, like losing your job or making an accident with their car, they would have to lend money from the bank. 

And when you lend money from the bank, you will have to pay them back plus more money for the interest. 

You want to get to a place where you have some cash on hand that you can easily take in case something happens. So, you can use that money instead of turning to a credit card or a person to lend you money every time. 

How to build an emergency fund

If you are in debt, you should just save CHF 1000 as an emergency fund, and then focus all your energy on paying off your debt. If you are already working or you have a side job, you should, generally saying, save about 6 months’ income or expenses. Maybe you are a freelancer, in this case I would say to try for 12 months of income or expenses. I know it’s not possible to get to this in one year but it’s just a goal to work towards.

If your monthly income is CHF 4’000 and you save for 6 months of your income, you should aim for CHF 24’000. If you do it with the expenses and let’s say you need 2’500 for your monthly expenses you need to multiply that by 6 months, so you should have 15’000. This is a bit riskier, because you don’t have that buffer between your income and expenses.

 I would recommend keeping this money in a separate account to avoid temptation of using that money for other things.

If you have a family and kids, of course your emergency fund will look very different than the emergency fund of a person living alone. 

Also, you should create an emergency fund before you start investing. Because when you are investing there is a possibility that your shares’ value can suddenly decrease. 

Where should my emergency fund?

Ideally you should save that money in a high-interest paying savings account and you should not have to pay fees just to store your money. Also you should be able to access your money quickly. The accound should be separated from your bank account that you use daily, so you’re not using the emergency fund. 

How do I start?

  1. Calculate how much you will need. There are many calculators out there, I would recommend: Emergency Fund Calculator 
  2. Set a goal how much money you want to put into that account
  3. Set up an automated transfer of money going directly to your emergency fund account. You can do this by calling your bank and telling them to move for example CHF 100 every month to that account. 
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