Six Keys to Creating an Emergency Fund

by Jeffrey Tucker, Managing Director for National Sales


I’m usually pretty sympathetic with my financial advice. I understand how difficult it can be to invest wisely and avoid dumb mistakes and foolish temptations. But on the topic of setting up an emergency fund, I’m quite strict.

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 2018 survey on financial security found that just 39% of Americans can cover a $1,000 emergency out of savings. And more than a third said they had a major unexpected expense in the past year averaging $2,500. The Federal Reserve’s Survey of Household Economics and Decisionmaking found that more than a quarter of adults skipped necessary medical care in 2017 due to being unable to afford the cost.

You’re Not Exempt

Just because you keep a large running balance in your checking account or own on a high minimum credit card, you still need an emergency fund. 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 is some basic advice for setting up and maintaining a proper emergency fund:

  • A basic savings or money market account is your best bet. Ideally it can be linked to your checking account. You want the money accessible in a day, but not in an instant. 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 risk*.

  • Look for an account that pays you back. Thanks to the rise in interest rates, many savings vehicles offer a small annual yield of around 1%. 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 if you have a number of dependents (you need more) or a spouse with a job (you may need less), or wealthy parents you can ask for help (again, you’d need less). If you have one income, are self-employed and have a family to support, you may want up to eight months in an emergency fund (and don’t neglect health and disability insurance).

  • If you don’t have that kind of cash on hand, set up an automatic transfer of, let’s say $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 springing a leak, or a large medical bill.

  • Replenish the account if you draw on the funds. Unplanned expenses aren’t one and done. They may even come in threes.

Setting up a fund like this may not be a thrill, but I’m confident that you’ll be glad you did. Even if you are the rare individual who doesn’t incur an unplanned expense for years, you’ll still benefit from peace of mind, knowing you have cash at the ready in case something goes wrong.

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or instrument, or to participate in any trading strategy. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Information contained herein has been obtained from sources considered to be reliable. Morgan Stanley Smith Barney LLC does not guarantee their accuracy or completeness.

*You could lose money in money market funds (MMFs). Although MMFs classified as government funds (i.e., MMFs that invest 99.5% of total assets in cash and/or securities backed by the U.S government) and retail funds (i.e., MMFs open to natural person investors only) seek to preserve value at $1.00 per share, they cannot guarantee they will do so. The price of other MMFs will fluctuate and when you sell shares they may be worth more or less than originally paid. MMFs may impose a fee upon sale or temporarily suspend sales if liquidity falls below required minimums. During suspensions, shares would not be available for purchases, withdrawals, check writing or ATM debits. A MMF investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency.

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CRC 21553581 (06/2018)