Basic Financial Concepts That You Should Know

Understanding basic financial instruments is crucial for managing your money wisely. Whether you're navigating good vs. bad debt, creating a "fuck-off fund," budgeting, or investing in the 3a pillar, these concepts form the foundation of your financial health. Let’s explore these essential topics step by step so that you can go off creating some generational wealth!

Table of contents:

• Good vs. bad debt
• Fuck-Off Fund
• Budgeting
• 3a Pillar
• How to implement those financial concepts in your everyday life

Good vs. bad debt

Let’s start this off with a juicy one: Good vs. bad debt. You may have been raised to believe that all debt is bad debt. But not all debt is created equally. There is a big difference between credit card debt and a real estate mortgage.

Good debt typically involves borrowing money to acquire assets that can generate income or appreciate in value over time, like a mortgage on a house. Similarly, student loans that lead to a higher-paying career can also be seen as good debt because they represent an investment in yourself, an asset that increases your earning potential. It GIVES you money in the long run.

Bad debt, on the other hand, often involves liabilities that cost more than they generate, such as high-interest credit card debt. Credit card debt is a prime example of bad debt because it usually finances consumer goods or experiences that lose value over time, like electronics or vacations. They take money OUT of your pocket.

Fuck-Off Fund

Yes, it’s exactly what it sounds like - a cushion of cash that gives you the financial freedom to tell the world (or your boss) to "fuck off" when things are threatening to harm your mental health. It's the equivalent of 3 months of your salary, saved and ready to be used as a safety net when you need it most.

Having a "Fuck-off Fund" means you can leave a toxic job, say goodbye to a toxic relationship, or pay an unexpected doctor's bill if your cat gets into a rough fight with a mouse. ;-P This fund’s purpose is that you don’t need to break your money flows and have to sell off investments when they are down 30%, thus being a very unfortunate moment to sell.

Not having a "Fuck-off Fund" in place will chain you to your boss and situations that do not work for you. It's about taking control of your life and giving yourself the financial freedom to make choices that align with your life and mental health. After all, financial freedom is overall freedom. 

How to build a Fuck-Off Fund

1. Calculate how big your “Fuck-off Fund” needs to be. (Remember: 3 months of net salary if you've been employed* within Switzerland in the past 24 months. If you don't fulfill the thresholds or are planning on leaving your job soon, opt for 6-12 months of your salary).

2. If you have that amount in your savings account, take it and put it in a different account. Or, better yet, in a different bank with different e-banking details, so you have no temptation to dip into it for stupid reasons. Done :-)

3. If you have no savings - no worries - we all start somewhere - however, you want to consider cutting back on expenses to free up more money for this safety net fund. Set up a separate account and put an automated amount into this account each month until it’s at the 3-month salary level. The easier you make this process for yourself, the better you'll execute on it. 

   Why am I even going on about this? Because this is an essential to do for you that you need to have done before starting to invest. We’ll be talking about this again later on, but having a “Fuck-off Fund” is one of them.

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Budgeting

Budgeting may seem restrictive, but it’s one of the puzzle pieces to financial freedom. By controlling your money, you empower yourself to make informed decisions about spending, saving, and investing. The “head in the sand” strategy that may work on ostriches won’t work for you.

Instead of thinking about budgeting as being restrictive and uncool, think about it as a tool to:

1. Gaining control
2. Help you define and optimize your savings rate
3. Intentionally spending money 

It is a tool that will help you give your money marching orders! That way, every Swiss Frank knows what to do and how to help you generate more money over time, whilst driving your freedom forward too.

3 biggest budgeting mistakes

When it comes to budgeting, people often make three major mistakes that can derail their financial plans:

• Not having a spending plan: Without a clear plan, it's easy to lose track of your money, leading to overspending and missing your savings goals.
• Failing to pull together accurate data: Many create budgets without thoroughly analyzing their past spending, resulting in unrealistic budgets that don't reflect their true financial habits.
• Thinking that budgeting is a one-time task: Your budget should be an ongoing, adaptable process that evolves with changes in your income, expenses, and financial goals over time. 

Ideally, your budget looks like this:

Here’s how you create your budget:

1. Pull 12 months of your spending data together via Excel 
2. Log into your bank / CC account and pull it from there, add other spendings manually
3. Code everything in Needs and Wants: Do I need this? How badly do I want it? What does your Future You think?
4. Categorize your level of control from Low (0) to High (3): How high is the level of control you have over this spending?
5. Categorize your level of happiness from Low (0) to High (3): How high is the level of happiness you have over this spending?
6. Take not of anything you want to optimize when going through the data
7. Now pull your new expense numbers. Check in: How much do you spend on Essentials, Fun and Goals? What do you need to adjust to get towards 50/30/20?

Remember, your budget is entirely dependent on your personal situation. It is dictated by how much you make, how much you spend, what financial goals you have and if you have other dependents (like kids).

Terrace Model

In the context of the terrace model for financial planning, here's a simplified breakdown, with each terrace representing a different financial priority:

1. First Terrace - Daily Finances and Emergency Funds: This level focuses on managing everyday cash flow through accounts like checking accounts and includes setting aside funds for emergencies, typically amounting to about one to three months of income.
2. Second Terrace - Short-Term Savings: This level is for short-term financial goals such as vacations or minor home repairs, where the money is relatively accessible but separate from day-to-day funds.
3. Third Terrace - Medium-Term Financial Goals: Here, you save for more substantial expenses that are not immediate but are expected in the medium term, like buying a new car.
4. Fourth Terrace - Long-Term Investments: The highest terrace focuses on long-term financial growth and security, like retirement savings or investments in stocks and real estate, which carry higher returns but also higher risk and longer commitment.

Imagine your earned money that you receive every month as water drops. The water drops flow from your salary into your first terrace and fill it up one by one. It slowly fills up. Only once the first terrace is filled to the brim does the next water drop from your salary flow into the second terrace. Meaning, you need to fill level one before moving on to level two, three and four.

3a Pillar

The 3a pillar is a tax-advantaged private savings plan in Switzerland, designed for retirement. You should aim at maximizing your contributions to the 3a pillar (investment, not insurance solution) every year. However, BEFORE investing in the 3a pillar, make sure you’ve built your "fuck-off fund" to handle emergencies. Go back to the top of the article for more information.

How to implement those financial concepts in your everyday life

To sum up, let’s have a look at how you can make use of these financial concepts right now:

1. Become debt-free: First and foremost, before doing any investments (be it 3a or ETFs), pay off all your “bad” debt such as credit card debt. Make it your number 1 priority!
2. Tax payments: Make sure you don’t have any outstanding tax payments and that you’ve put money aside for the current year’s tax payments.
3. Fill your fuck-off fund: Once your debt and taxes are taken care off, you can start on your fuck-off fund. Make sure to save at least 3 full monthly salaries - even more if you are unhappy with your job and might consider a change in the upcoming months.
4. Get started on your 3a pillar: With step 1-3 concluded, you can now start with your 3a investments! My recommendation would be to open 5 different accounts and fill them up in parallel. Remember, when I mean 3a contributions, I mean investment / banking solutions (such as finpension, TrueWealth) and not insurance solutions. Also: If you’re taxed at source (Quellensteuer; below 120’000.- household income) and can’t benefit from tax deductions, focus on investing monthly in ETFs through a robo-advisor instead of paying into the 3a. Find more about this topic and how the source tax influences your 3a investments here.
5. Max out your 3a: Your focus in the upcoming time should be to max out all of your 3a “pots”. The maximum deductible amount across all of your 3a accounts is 7’056.- (2024). As of 2025, this number will increase to 7’258.-.
6. Start investing: Once your 3a pillar is maxed out, the time has come to think about other investments such as ETFs. A great way to get started is my free workshop, where I’ll explain everything you need to know! 

Conclusion and recommendations

Building a solid financial foundation is all about making smart, informed decisions at every stage of your journey. From distinguishing between good and bad debt to creating a "fuck-off fund," understanding the terrace model, and leveraging the tax advantages of the 3a pillar, each of these concepts serves as a stepping stone toward financial freedom.

The key takeaway? Start where you are and prioritize what’s most urgent for your situation. Whether it's paying off high-interest debt, setting aside an emergency fund, or investing strategically in your 3a pillar, these steps help you take control of your financial future, one step at a time.