Six steps to creating an emergency fund
Insights from Morgan Stanley Wealth Management08/24/21
Summary: We all know we should have money set aside for emergencies. Here’s how to go about it.
Keeping a stash of cash on hand in case of an emergency is essential. The problem is that too few people actually create a dedicated emergency fund.
It’s a big mistake. Bankrate’s 2021 survey on financial security found that fewer than four in 10 Americans could cover a $1,000 emergency out of savings. For younger generations, it’s even less: Only a third of Millennials could turn to an emergency fund.1
Having a healthy balance in a checking account or access to a credit card isn’t an excuse—you should still have a dedicated fund for emergency expenses. It should be separate from your day-to-day cash to make sure it’s there when you need it. Borrowing to cover an unexpected expense can be the start of a financial hole that’s difficult to dig out of.
Here are six steps to set up and start maintaining a proper emergency fund:
- A basic savings or money market account is a good option. 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 would be subject to market fluctuations.
- 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.
- Stash away enough to cover three to six months of expenses. The amount you need will vary depending on 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.
- Make it automatic. If you don’t have that kind of cash on hand, set up an automatic transfer of, say $50–100 a month, into the account until you reach your target.
- 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.
- Replenish the account if you draw on the funds. Unplanned expenses aren’t one and done—and 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 26, 2021.
- Bankrate, “Survey: Fewer than 4 in 10 Americans could pay a surprise $1,000 bill from savings,” 1/11/21, https://www.bankrate.com/banking/savings/financial-security-january-2021/