Life without surprises would be bland, but some unexpected events can seriously disrupt our financial stability. The best way to prepare for life’s twists and turns is to build an emergency fund. However, the main question remains: what amount is enough to truly feel secure?
There are two main approaches to determining the size of the so-called ‘financial cushion.’ The first method suggests focusing on your monthly expenses. Calculate all mandatory costs, including rent or mortgage, utility bills, food, transportation, and insurance. Multiply this total by three—ideally, by six. For example, if your monthly expenses are €1,500 and your net income is €2,000, then your emergency fund should be between €4,500 and €9,000.
The second, more conservative approach recommends basing the sum on your net monthly income. This strategy offers greater protection in case of prolonged financial difficulties, such as job loss. Using the same example, someone earning €2,000 would need to save between €6,000 and €12,000. This amount becomes your untouchable reserve, which should be easily accessible in a current account.
Understanding the necessary size of your emergency fund is key to building a sound financial strategy. If you haven’t established such a fund yet, your main priority should be creating one to achieve peace of mind and independence from loans. If your savings exceed the recommended amount, it’s time to consider more profitable financial tools. Keeping excess funds in a current account is inefficient, as inflation gradually erodes their value.
Smart savings management serves two purposes. First, it protects your capital from inflation, which relentlessly reduces purchasing power. Second, it allows your money to work and generate income. Investing surplus funds according to your risk profile can greatly increase your capital. For example, investing €25,000 for 15 years at 3% annual interest with reinvestment can turn it into nearly €39,000. At a 5% return, the final amount approaches €52,000, and with riskier but more lucrative strategies, the results can be even more impressive.
