What is an emergency fund and how much should it be?

With the term rainy day fund it is not a literal coin, but a figurative term that stands for savings. The savings can, as the word suggests, be used when one gets into financial difficulties. This could be sudden unemployment, a burglary, or a major repair that needs to be done at home and cannot be covered by current earnings (e.g., if the washing machine or car breaks down). If a household has built up reserves, these can help out of a financial jam. Generations shaped by economic instability are particularly familiar with the concept of a „rainy day fund.“.
Before there were deposit and investment options at the bank, pennies were put into a piggy bank. The term likely originated because people used to actually take coins to save up a certain amount.
Even today, earners should strive to build up reserves and consistently set aside small amounts from their salary. One never knows when it might be important to have an extra sum of money available.

How do I build up an emergency fund?

Money can be generated through traditional saving by not spending all inherited or earned money, but rather setting a portion aside. Interest income or dividend payments can also be used for savings. In principle, any cash flow that is not immediately and urgently needed in the household to cover necessary expenses is suitable for this.
The rule of thumb is that an emergency fund should be at least three monthly salaries. Depending on income, it can also be more if the saver is more security-oriented.
However, three months' salary is highly recommended, as the cushion will then even help you through a period of unemployment.
Everyone knows that unemployment due to one's own fault with the employment office causes a three-month disqualification and this can always happen unexpectedly (e.g., immediate termination due to a dispute with the boss, a gross error, an unintentional violation of data protection laws, etc.).
So, the three months' salary is a good guideline. Saving is particularly recommended when a household is doing well economically. Then money can easily be set aside without being missed elsewhere.

How high should the emergency fund be?

Fixed amounts like 1,000 or 10,000 Euros are not recommended as an emergency fund, because everyone's life is different. For someone who qualifies for unemployment benefits, it will surely look different than for someone who does not. The emergency fund should generally be sufficient to bridge 6 months or longer. A rule of thumb suggests this should be approximately 6 net monthly salaries. However, this can also be higher or lower depending on your financial situation and standard of living. A family with 2 children and an income will certainly need a bit more than a household with 2 incomes from different employers and without children.

Where should the sum be kept?

Those who keep money at home in bills under the pillow or elsewhere in the house run the risk of the money's value being destroyed by a house fire or burglary. Or simply spending the money.

That's why it's better to take the money to the bank and keep it in a separate account. While previously people mostly used a savings account for this, it hardly offers any interest nowadays. Additionally, depending on the provider's regulations, the money may not be immediately available, and it can take days for it to arrive in the reference account if needed. So, in an emergency, it's not directly accessible.

Against this background, a separate current account is more suitable. Due to its easy availability, there is a risk that you might spend it. The model of the current account is therefore only suitable for disciplined savers, even if you unfortunately have to bear the loss due to inflation. Classic investment products on the financial market offer an alternative. Attention should be paid to the speed of payout and low risk of loss.