Emergency Funds in Switzerland: A Practical Guide

There are situations – such as your car having a major breakdown or your teeth needing an expensive dental treatment – when it is helpful to have extra money on hand. This guide answers key questions about setting up and maintaining an emergency fund in Switzerland.

What is an emergency fund and why do I need it?

An emergency fund is an amount of money that you set aside for financial emergencies and unforeseeable expenses. An emergency fund is sometimes called a rainy day fund. This money is only used when you have to cover high, unexpected costs within a short period of time. Examples include expensive repairs, family disasters, and unemployment.

Having an emergency reserve is important because it protects you from getting into debt. Your savings enable you to deal with financial emergencies without having to get a personal loan or carry a negative balance on your credit card. That is beneficial because loans are expensive.

How much money should I keep in my emergency fund?

Your emergency fund should be equivalent to between three and six times the amount of money needed to cover your monthly budget, depending on your personal situation. That means if your monthly budget is 4000 francs, then you should have at least 12,000 or 24,000 francs in your emergency fund. In order to find out exactly how big your emergency fund should be, you have to calculate your budget as precisely as possible.

Whether you should keep three or six monthly budgets in your fund depends on your personal risk tolerance and your individual circumstances. If you live alone and rent a cheap apartment, you may well get by with a smaller emergency fund than if you have a family and own your own home. If you are self-employed, you generally need a bigger emergency fund than an employee. If you have only just begun to earn an income, you will likely have less savings than people who have already been working for a long time.

Who should I hold my emergency fund?

The money in your emergency fund has to be easily accessible at all times. Because of that, there are only three sensible ways to hold your emergency fund: In a private account, in a savings account, or in cash at home or in a safe deposit box. The advantage of keeping your fund in a savings account is that you normally earn more interest compared to keeping it in a private account. Additionally, savings accounts generally do not have basic, ongoing account fees.

However, you should pay attention to limitations for withdrawals from savings accounts, as they are often stricter than those of private accounts. Only use an account which lets you withdraw your entire emergency fund. You can compare both private accounts and savings accounts on moneyland.ch.

The returns earned are of secondary importance when it comes to your emergency fund. Higher returns normally come with more risks, or with limitations that prevent you from accessing your money immediately. You should look at your emergency fund as a necessary insurance, and the potential returns you miss out on as the insurance premium you pay for this insurance. In other words, while it may be possible to earn a higher return by investing your emergency fund in more risky investments, by doing so you would run the risk of not having the money available when you need it.

It is also beneficial to keep your emergency fund in a different bank account that is separate from your main bank account, and possibly at a different bank as well. That helps you avoid the temptation to dig into your emergency fund to cover everyday expenses. If your emergency fund is large, it is also beneficial to divide it up between more than one bank, because the Swiss bank depositor protection scheme only covers up to 100,000 francs per customer and bank. It is also worth noting that some banks require you to have a paid private account in order to open a savings account.

What should I pay attention to when choosing a savings account for my emergency fund?

In addition to the interest rate, the terms and conditions for withdrawals are the most important thing. As well as checking the required notice period for withdrawals, you should also look at limits on the amounts you can withdraw without having to give advance notice or pay a penalty fee. The limits may be per-month or per-year.

Some savings accounts, especially high-yield savings accounts, have tigher restrictions on withdrawals. There are savings accounts which completely block your money for the first 12 months, and have long required notice periods after that. While it is technically possible to withdraw your money at any time, the bank can charge you high penalty fees if you do not stick with the pre-agreed conditions. Accounts with these kinds of limitations should not be used for an emergency fund.

It is very important that you are able to withdraw your emergency fund at any time without penalties. For example, if you have a 20,000-franc emergency fund, but can only withdraw up to 10,000 francs per month from your savings account without a penalty fee, then that savings account is not suitable, or is only suitable for part of your emergency fund (10,000 francs, in this case).

Should I invest my emergency fund in stocks and ETFs?

No. Securities like stocks and exchange-traded funds (ETFs) are not suitable for an emergency fund. Although it is possible to liquidate your assets at any time, you risk losing money if you are forced to sell your investments at a bad time due to a financial emergency. Stocks and ETFs are generally only suited to long investment terms of at least seven years.

Should I keep my emergency funds in fixed deposits and medium-term notes?

No. Swiss fixed deposit accounts and medium-term notes are not suitable for an emergency fund. Your emergency fund should be available at all times. Swiss fixed deposits and medium-term notes typically have a minimum fixed term of one year. The only way to get your money back before the term expires is to pay a high penalty fee.

Can I keep my emergency fund in the pillar 3a?

No. The pillar 3a is not suitable for an emergency fund, regardless of whether you use a conventional pillar 3a savings account or a pillar 3a retirement fund. With a few exceptions, money placed in the pillar 3a is blocked until you reach the legal retirement age. So you normally will not be able to withdraw your money in an emergency. Additionally, there is a limit for how much you can contribute to the pillar 3a.

How can I build up an emergency fund?

Saving up the money for an emergency fund requires discipline and tight control over your expenses. Following these steps can help you build an emergency fund:

• Set a goal: Deciding exactly how much money you want to keep in your emergency fund can help motivate you to save.
• Make a budget: Before you can save money effectively, you first have to known exactly how high your expenses are. Carefully planning your budget is also crucial to finding out how much money you need to keep in your emergency fund, and how much you need to save every month to build up that amount. Make sure to budget for taxes separately.
• Control your spending: Do you really know how much you spend, and on what? Take time to review your expenses and terminate unnecessary contracts. Also check how much you spend on your mobile plan and bank account. Many Swiss consumers do not take advantage of these potential savings. Moving to a cheaper health insurance can also save you money. The comparisons on moneyland.ch make it easy to find the cheapest available offers.
• Set up a standing order: Transferring the money you want to save immediately after you receive your salary will help you avoid the risk of using all of your income on everyday consumption. Setting up a standing order for this purpose is a smart move. The amount you save should make sense in relation to your income and your living expenses.
• Save supplemental income: Saving any extra money you receive on top of your normal income, such as bonuses from an employer, will help you build up your emergency fund faster. If you receive a thirteenth monthly salary each year, then that money, too, can go towards your emergency fund.

More on this topic:
How to plan your budget
How to save money
How to reduce your living expenses
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