Six steps to creating an emergency fund

According to Bankrate’s 2024 annual emergency savings report, (27%) of US adults have no savings, while (29%) of people have savings that cover less than 3 months of expenses and only (28%) have enough savings to cover a minimum of six months.¹ Two in three Americans allege they are saving less due to economic factors such as inflation, rising interest rates, and employment changes.¹

If you dipped into your emergency fund recently—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:

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.

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.

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 of expenses in an emergency fund. Alternatively, if you are in a joint-income household, three months may be adequate.

If establishing three to six months of expenses is overwhelming, consider starting small. Set up an automatic transfer into the account until you reach your target. An amount of, say $100 a month, should leave you with a minimum balance of $1200 in your emergency fund after a year.

Your emergency fund should solely be for emergencies. This means changes in circumstances or important situations that require urgency and immediate consideration. Emergencies could include your car breaking down, losing your job, the roof starting to leak, or a large medical bill.

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

For many Americans, it has become a challenge to create or maintain a savings account, let alone establish a dedicated emergency fund. 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. Nevertheless, keeping a reserved amount of cash for emergencies is essential. Planning for the unexpected can help set you on the path toward financial success in both the short and long term.

Article Footnotes

    1. Bankrate, 2023 annual emergency savings report, 3/19/24,                               https://www.bankrate.com/banking/savings/emergency-savings-report/

The source of this Morgan Stanley article, Six Steps to Creating an Emergency Fund, was published on March 19, 2024.

CRC# 3809558  10/2024