Imagine a situation where your income disappears overnight. Or you're hospitalized and the insurer won't cover the procedure you need. If you don't have a financial reserve, this scenario is probably a nightmare for you. But if you've thought about a financial reserve — and done it right — you're calm. Let's learn everything about the financial reserve that you need to set one up, improve it, or manage it.
What is a financial reserve and why is it important?
A financial reserve (sometimes also called an emergency reserve or a liquid financial reserve) is an amount of money you've set aside for unexpected expenses or a loss of income. It serves as protection against all kinds of financial crises, helps keep your budget stable, and lets you invest with peace of mind. You could also say that it is a fundamental pillar of healthy finances.
What is an operational and a long-term financial reserve?
- Operational financial reserve: Serves to cover short-term unexpected expenses (car repair, buying a new washing machine, a sudden loss of income).
- Long-term financial reserve: Is intended for larger life changes, such as job loss, illness, or larger investments in the future.
What or when will you most often use the financial reserve for?
The reserve is intended for unexpected expenses or a loss of income, for example:
- Job loss
- Repair of household appliances or the car
- Medical or legal expenses
- Sudden expenses related to housing (e.g. a higher energy bill underpayment)
- A necessary move
- Catastrophic or other extraordinary events
How large should your financial reserve be? Experts' recommendations
How much money should you set aside? Experts recommend having a reserve of 3 to 6 months' worth of expenses. So if every month you spend 40,000 KÄŤ on rent, energy, fuel or a public-transit pass, phone, internet, and food, your financial reserve should be somewhere between 120,000 and 240,000 KÄŤ.
It's important to note, though, that it often also depends on your life situation. The financial reserve of a household (or family) in which children also live should cover at least 6 months of expenses due to the higher financial responsibility. Do you live alone? 3–6 months of ordinary expenses will be enough for you.
The average financial reserve in the Czech Republic – do Czechs have enough savings?
According to surveys, more than half of Czechs have a reserve lower than the minimum recommended financial reserve, i.e. 3 months' expenses. That's risky, because they're not prepared for an unexpected financial expense (Prosperity Index, 2024).
As many as 56.6% of low-income households (with income below 60% of the median wage) have no financial reserve. In 2023 it was 52% (Prosperity Index, 2024) – we can see an unwelcome, rising trend here.
- For immediate use, in 35% of cases Czechs have set aside up to 20 thousand crowns (Prosperity Index, 2023). However, that is not an optimal financial reserve.
- 29% of Czechs would last with their financial reserve less than a month (Prosperity Index, 2023).
- More than three months, then, is how long 34% of the Czech population would last (Prosperity Index, 2023).
The 4 most common mistakes in managing a financial reserve
1. Insufficient amount
As you may already suspect from the previous statistics, one of the most common mistakes in managing a financial reserve is its insufficient amount. This can lead to financial problems in unexpected situations.
"When building a financial reserve, as with investing, it's important to take that first step. To start, to acquire the habit and the routine. And feel free to start even with small amounts, a few hundred or a thousand crowns, if your overall situation doesn't allow otherwise. But it's definitely better than waiting until your situation changes. You could be waiting forever," says Lukáš Přikryl, CMO of InvestBay.
2. Withdrawing money from the reserve for not-so-essential expenses
Another risk is irresponsibly drawing on the reserve, for example for impulse purchases, travel, or luxury expenses, which you should finance from other sources. The financial reserve is for essential expenses, not whims.
If you want to build a real financial reserve, count on dipping into it only in a crisis situation — not for a holiday or Christmas gifts.
For this type of pleasures, feel free to set up another virtual envelope or account. One into which you'll send extra money according to your goal.
3. Saving in a current account or at home under the pillow
Excessive saving in a current account means that the money gradually loses value due to inflation, instead of working and bringing returns.
Reading tip: What the most advantageous saving looks like, or how and how much to save
Likewise, keeping cash at home, the so-called "under the pillow" saving, isn't ideal, because not only does the money lose value, but it's also not protected against theft or unexpected events.
Where to put the money that will serve as a liquid financial reserve? Ideally in a savings account with a good interest rate.
Don't know what a liquid financial reserve is? Money that you can have available (almost) immediately. Read more on the topic of liquidity in our article: Investment liquidity: What it is and how to calculate it.
How to build a financial reserve?
Step 1: Know your current situation
Set aside a moment to sit down with paper and pencil (or an Excel spreadsheet) and write down how much you actually need each month for ordinary functioning. Include here:
- rent or mortgage,
- energy deposits,
- food costs,
and so on. Once you have these "must-have" expenses in black and white, look at what went out of your account over the last month on top of that – impulse purchases, food delivery, coffee to go, or perhaps subscriptions to services you barely use.
You may be surprised by how large an amount is made up of things you'd survive perfectly fine without. And no, you don't have to give all of them up right away. It's enough to realize how much money could be set aside painlessly.
Step 2: Set yourself rules
Now set yourself a fixed amount that you'll set aside every month right after payday. Even better is to set up automatic transfers in your banking app – say 10% of your income into a special account that you can't easily get to. You can use a savings account or another account without a card, to keep your reserves away from everyday temptation.
A mobile app or smart banking can also make tracking expenses easier – most banks today can automatically sort your payments and assess where you spend the most.
This is how to save your reserve gradually and over the long term. Your priority is a liquid reserve, which you can withdraw in urgent cases when you need it. Once you have it secured, you can start exploring investment options, that is, further growing your finances.
Explore investment options that will help you grow your reserve
Right at the very start, it will be advantageous to invest in rather liquid assets.
However, if you manage to save up significantly more than the original plan, then look around for options where your money won't get lost – for instance in the world of micro-investing. With us at InvestBay, you invest smartly, simply, and from an amount you'd ordinarily spend on a few dinners in town – they're just not liquid within 24 hours.
And maybe it'll help you secure an attractive retirement.
Imagine you've saved up a financial reserve of 300,000 KÄŤ. Part of it (e.g. 100,000 KÄŤ) you can use to invest in real estate and let the money grow, while the remaining 200,000 KÄŤ will be available for unexpected expenses.
And what's more: At InvestBay you get stable returns from rental and then also from the sale of the property. Register today via the button in the top menu!
Don't know how to go about investing? Read our article How to start investing, where we explain it even to complete beginners. And if you already know something about investing, you'll certainly be interested in these articles:
- A comprehensive and practical guide to diversifying investments
- How and what is best to invest money in
- Investing in real-estate funds: A detailed and understandable guide
- Investment funds: An A–Z guide
Our bonus tip
Try to map out the unexpected money that comes in on top as well – say a bonus, a tax refund, or a cash gift. Keep part of it for a treat, but send the rest straight into the reserve.
Want to not only protect your financial reserve but also grow it? Take a look at the current investment opportunities at InvestBay and let your money work!
What if you draw down your financial reserve?
Maybe you reached into your financial reserve because an unexpected expense came up. That happens. But once the situation calms down – say you start a new job or the expected income arrives – make it your goal to gradually rebuild the reserve again. It's precisely thanks to it that you'll have somewhere to turn again in the future, when needed.
And go about it the same way as the first time:
- Plan it out: Break the goal into small amounts that you can set aside regularly – say right after payday.
- Stay the course: Keep checking how you're doing. When needed, adjust the plan slightly – but keep the main goal always in sight.
Having a well-set short-term financial reserve will give you not only greater certainty, but also peace of mind. Knowing that you have something to draw on when something goes wrong is priceless. So always think about when it's truly necessary to use the reserve – it's your personal life ring.
Frequently asked questions
What is a household financial reserve and what is it for?
A household financial reserve is savings intended for unexpected expenses – for example a broken washing machine, a car repair, a loss of income, or medical expenses. It lets you bridge a financially demanding period without having to take out loans.
How large should a financial reserve be, or how much should I have saved up?
Generally, it's recommended to have 3 to 6 months of monthly expenses saved up. If your monthly expenses are 30,000 KÄŤ, your financial reserve should be at least 90,000 KÄŤ to 180,000 KÄŤ. The amount of the reserve, however, depends on your lifestyle, commitments, and job.
When does it make sense to keep a reserve just in an account, and when to invest it?
A short-term reserve should be quickly accessible, so keep it in a savings account. A long-term reserve, though, you can let work. Through investments in liquid assets, if you need to have the money on hand, or for instance in the form of real-estate investments, if high liquidity is at the bottom of your list of priorities.
Take a look at our current property offering!
How much should I have saved at the age of 35?
According to financial experts, a person at 35 should have twice their annual income saved up. This includes not only the financial reserve, but also real-estate investments and retirement savings.
How to connect a financial reserve with smart investing?
If you don't want your money to lose value due to inflation, you can invest part of the reserve, for example in real-estate crowdfunding through InvestBay – that way you'll preserve both stability and returns.
When is the right time to start investing part of the reserve?
Once you have a sufficient operational reserve, you can start growing the surplus money.
How much to set aside from your paycheck?
It's recommended to set aside at least 10% of every paycheck. If that's not possible, start with a smaller amount and gradually increase it. The important thing is to build the habit of regular saving.
How to manage the reserve effectively?
The reserve should be quickly accessible, ideally in a savings account. If you have higher savings, you can invest the long-term part in stable assets, for example real estate, so that the money doesn't lose value due to inflation.
What if I don't have a sufficient reserve?
Start with small steps, regularly set aside even smaller amounts, and avoid impulse purchases. It's better to have at least something than nothing – the reserve will gradually grow.
A financial reserve will give you a calmer life and greater financial stability. Start today and protect your finances against unexpected situations.
Sources used:
- Index Prosperity. (2023). Krátkodobá rezerva: Proč je důležitá a jak ji vytvořit. https://www.indexprosperity.cz/2023/kratkodoba-rezerva/
- Index Prosperity. (2024). FinanÄŤnĂ zdravĂ: Jak na tom jsme a co s tĂm mĹŻĹľeme dÄ›lat? https://www.indexprosperity.cz/2024/financni-zdravi-2/
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