Six steps to creating an emergency fund

Morgan Stanley Wealth Management


Summary: We all know we should have money set aside for emergencies. Here’s how to go about it.

Keeping a reserve of cash on hand in case of an emergency is essential. For many, it’s challenging to create a dedicated emergency fund and even more difficult to maintain.

Bankrate’s 2022 survey on financial security found that only about four in 10 Americans could cover a $1,000 emergency out of savings.1 One in five adults would turn to a credit card—a move that can end up costing more in the long run.

If you dipped into your emergency fund over the past few years—or never had one in the first place—make it a priority to set aside sufficient emergency savings.

Here are six steps to build and maintain a solid emergency fund:

1. Consider using a basic savings or money market account

Your emergency fund should be separate from your day-to-day cash to make sure it’s there when you need it. Ideally it can be linked to your checking account. You want the money accessible in a day, but not in an instant. Since you want this money to stay safe and liquid, it should not be invested in stocks or even bonds, where it may be subject to market fluctuations.

2. Look for an account that pays you back

Some savings vehicles offer a small annual yield. It’s important to note that some of those may have minimum deposit or balance requirements. Shop around. Make sure there are no annual fees.

3. Save enough to cover three to six months of expenses

The amount you need will vary depending on if your individual situation. If you have dependents or are self-employed, you may want up to eight months in an emergency fund. Alternatively, if you are in a joint-income household, three months may be adequate.

4. Start small

If you don’t have that kind of cash on hand, set up an automatic transfer of, say $100 a month, into the account until you reach your target.

5. Only tap it for true emergencies

This could include your car breaking down, losing your job, the roof starting to leak, or a large medical bill.

6. Replenish what you use

Don’t forget to restore funds that you’ve drawn down. Unplanned expenses aren’t one and done. They may even come in threes.

Many people juggle competing financial goals—from building a budget to planning for retirement to investing in the stock market—which can make it hard to prioritize setting up an emergency fund. But planning for the unexpected can help set you on the path toward financial success in both the short and long term.

The source of this Morgan Stanley article, Six Steps to Creating an Emergency Fund, was originally published on January 24, 2022.

  1. Bankrate, “Survey: Less than half of Americans have savings to cover a $1,000 surprise expense,” 1/19/22,

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What to read next...

Check out these five steps to help make smart spending and saving decisions.

Here are four key guidelines to help you prioritize your saving and balance your long- and short-term financial goals. 1) Create a budget. 2) Build an emergency fund, then prioritize long-term goals. 3) Save separately for short-term goals. 4) Boost your saving and be disciplined about spending.

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