How big should my cash reserve be?

Question: I want to protect myself against unforeseen costs with an emergency fund, for example in case I lose my job. How much money should I have in my account as a cushion?

Answer: The size of your liquidity cushion depends on your circumstances and your need for security. If no one is financially dependent on you, you don’t usually have to set aside as much money for emergencies as when you have a family, for example.

Your regular expenses are the key reference point for the size of your emergency fund. You should therefore first check how much you spend each month on rent and utilities as well as on your telephone, internet, food, transportation and leisure activities. For peace of mind, you should have a cash reserve of at least three months’ expenses in your savings account – i.e. CHF 15,000 if you spend CHF 5,000. You can use this to pay for unexpected repairs, medical bills or tax debts.

You have more financial leeway if you set aside three months’ wages instead of three months’ expenses. Your reserves should be even larger if you generally have a higher need for security. A good guideline is then four to six months’ wages.

If you have children or need to pay off a mortgage, you should also save more money for unforeseen expenses. Ideally, you should create three savings pots:

• Pot 1: for minor emergencies such as broken household appliances or visits to the dentist, it is advisable to have a reserve of three months’ wages in your savings account.

• Pot 2: you should set one and a half to two months’ wages aside for paying taxes and insurance.

• Pot 3: and another one to two months' wages for chance purchases, such as a TV at a bargain sale.

Whether you are single or have a family: if your monthly expenses increase, you will also need to increase your financial cushion.

The expert

Barbara Leo is a customer adviser at Migros Bank.