Building an Emergency Fund in Switzerland: Why, What, and How

As a prudent investor, you might have already established a lifetime investment plan, making regular contributions deployed across a well-diversified portfolio of real estate, debt, and equity assets for better risk-adjusted returns. With these prudent measures in place, it’s easy, and even somewhat reasonable, for one to assume that their financial future is secure and free from financial worries.

That said, there remains a chance – however miserable it may be – that an unforeseen moment of chaos and fear, triggering a seemingly trivial oversight by you or a family member, could lead to a large part of your home being consumed by fire. Of course, being a wise householder, the structure and contents of your home are fully insured, including furniture, clothing, artwork, and all of the other accouterments of family life.

Even so, however, pending your claim on the insurers, you are still liable for the possibly very significant expense of hiring a contractor to secure your semi-destroyed house against the continuing risk of injury to others from, for example, loose timbers, crumbling masonry, or electrical faults.

On a more personal note, you may urgently need to find and pay for alternative accommodation for you and the family, buy new clothing and other necessities to replace those damaged in the conflagration, or even rent the car if yours was damaged in the chaos.

Altogether, even if expenses will, in due course, be recovered under the terms of your insurance policy at some point, you could have an immediate need for tens of thousands of francs. Will the damage be refunded in full? The honest answer is: Maybe. Getting insurance companies to settle a claim can be very complicated, not to mention that it can take much longer than expected.

None of this should sound too upsetting if you have had enough foresight to establish a personal emergency fund – a sum of money, distinct from your regular savings, set aside specifically for the kind of rainy day described.

How Big Should Your Emergency Fund Be?

In the past, having a fund equal to 3 to 6 months of your salary was considered adequate. A century ago, when lifetime employment was a lot more common, this made sense. In today’s world, things are different. Indeed, people tend to change employers more readily and, as a result, employers have become more aggressive with the management of their human resources.

This is especially true in the field of financial services, which employs a large number of Swiss individuals. Banks are merging, big wealth managers are acquiring smaller competitors, and foreign behemoths are constantly trying to buy a bigger slice of our domestic cake. Any of these events can result in staff redundancies and other unexpected employment upheavals, which employees have no control over.

All of the foregoing suggests that your emergency fund should be the equivalent of at least 6+ months’ salary. Should another pandemic strike, which later caused a COVID-19 crisis in 2020, many could all be locked down again for many months, potentially experiencing a significant loss of income. The same could be said of the effects of any major international financial or economic crisis. The last one was in 2022, following the Russian invasion of Ukraine. Roughly speaking, such setbacks seem to occur every ten years or so, but they can conceivably happen more frequently.

The crisis timeline below only covers the US. However, there’s an old saying that, “when Wall Street sneezes, the world catches a cold.” This adage holds true and will likely continue to do so for as long as the US dollar remains dominant as the currency of choice for international transactions.

US financial crises over the past 60 years
Source: See It Market

The financial and employment upheaval caused by the 2020 pandemic, as well as the 2022 explosion in interest and inflation rates, persisted for at least a year. With this in mind, even though the target may not be achievable immediately, the most sensible thing to do would be to aim to set aside a sum equivalent to up to 12 months' worth of salary.

Where Should You Keep Your Emergency Fund?

All things considered, you may reasonably ask, “How should a 12-month-salary-size emergency fund be invested?” But the truth is, this question actually misses the mark. Investing aims to generate returns, i.e., profits. This is not the purpose of an emergency fund, but to preserve the value of your money, not to increase it.

Simply put, maintaining an emergency fund entails an opportunity cost. Rather than setting aside funds for unforeseen circumstances – which, realistically, could span several months – you might instead want to allocate that money to your savings plan. Over time, this approach could significantly enhance your financial reserves, ultimately supporting a comfortable retirement.

Think of your “bad-times fund” as an insurance policy: the premium you pay is the investment returns you pass up on to create it. You do this to ensure that none of life’s habitual setbacks can prevent you from reaching the trouble-free retirement you’ve been so diligently saving for.

How to Preserve the Value of an Emergency Fund – And What Exactly “Preserve” Means in This Particular Context

To be effective, the money in your fund must be accessible pretty much instantaneously. In other words, you need to be able to withdraw a substantial portion of it within no more than 24 hours. At the same time, the fund should be preserved from the effects of inflation. It wouldn't be helpful if, after some years, you need money urgently, only to find that rising prices have reduced your fund’s value by 10% or more.

These twin concerns of accessibility and preservation severely restrict your options for its management. There can be no allocations to equities or any other asset – including short-term bonds – that entails the risk of adverse market trends that might diminish your fund’s value.

That said, you could place the money on a sight deposit with a reputable bank. Yet, while this avoids exposure to more risky assets, inflation remains a threat. At 1.4%, it is low by international standards but has risen recently and remains far above the interest rates offered by any of our leading banks (the highest being 0.85% offered by Zürcher Kantonalbank and Migros Bank).

Monthly Swiss inflation rate over the past year (in %)
Source: Trading Economics

In order to earn interest that at least comes closer to matching our rate of inflation, you will have to avoid big banking institutions. Their rates for sight deposits are zero and, even accounts with restricted accessibility don’t match, let alone exceed, inflation. On the other hand, smaller banks offer more, but even the most generous among them barely compete with inflation.

A better option might be an exchange-traded fund (ETF), such as the iShares Swiss Domestic Government Bond 0-3 ETF, managed by the Swiss subsidiary of US investment management giant, BlackRock. It trades on the Swiss stock exchange and can be sold on any trading day. Currently, the sale proceeds are available in two days, but there are discussions in progress to reduce this to a single day. It offers a yield of a little over 1.3%, which more or less meets both the preservation requirement and, in due course, the accessibility requirement.

Conclusion

An emergency fund should be treated as an insurance measure. This may mean that it actually costs you to have one. With just a little research effort, however, that cost can be reduced to an insignificant level. Yet, what value can really be assigned to the peace of mind derived from knowing your financial security and family's welfare are protected from potential disasters?

It's crucial, though, to underscore that while establishing an emergency fund is important, so is investing. Unlike emergency funds, investments are designed to grow your wealth rather than just preserve it. Therefore, it's imperative to strike a balance between building a financial safety net and exploring avenues for wealth growth through prudent investment strategies.