Six Steps to Creating an Emergency Fund | Morgan Stanley (2024)

FAQs

What are the steps to setting up an emergency fund? ›

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

The standard time frame for an emergency fund is 6 months of essential monthly expenses. Your personal financial circ*mstances may differ, as you plan for emergencies ask these 5 questions to start. The accumulated amount is determined by multiplying your monthly total expenses by your desired time horizon.

Income shocks tend to be more expensive and last longer than spending shocks. They also tend to happen less frequently. To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses.

Lastly, only 28 percent of people have at least six months' expenses saved, down from 30 percent in 2023. Another 16 percent of people have between three and five months' expenses saved, the lowest percentage since 2018.

Aim to have three to six months' worth of expenses set aside. To figure out how much you should have saved for emergencies, simply multiply the amount of money you spend each month on expenses by either three or six months to get your target goal amount.

A Millionaire's Best Friend: Compound Growth

Here's a little secret: Compound growth, also called compound interest, is a millionaire's best friend. It's the money your money makes.

Bank or credit union account — If you have an account with a bank or credit union—generally considered one of the safest places to put your money—it might make sense to have a dedicated account where you can keep and maintain these funds.

How much emergency fund is enough? ›

While personal finance experts recommend putting aside 3 to 6 months of monthly expenses for your emergency fund, the amount to allocate should depend on your household's financial situation.

69% of millionaires did not average $100,000 or more in household income per year-and (get this) one-third of millionaires NEVER had a six-figure household income in their entire careers. When people don't waste money trying to LOOK wealthy, they have money to actually BECOME wealthy.

Financial guru Dave Ramsey recommends starting by saving $1,000 in an emergency fund ($500 if you make less than $20K a year) that you won't touch for any reason other than an actual emergency. That way, when your car or home needs an unexpected repair or you face an unexpected medical bill, you're prepared for it.

How Much You Should Have in Your Emergency Savings. Here's a Dave Ramsey principle we agree with: If you make less than $20,000 per year, aim to have at least $500 in emergency savings. If you make more than $20,000, then aim for at least $1,000.

Financial planners generally recommend stashing three to six months' worth of living expenses away in an emergency fund. More than half of Americans — 56% — say they have less than three months of expenses saved, including 27% who say they have no emergency savings at all.

It can take months or years to reach the desired amount for your emergency fund. It's better to start with a small amount so that you don't get discouraged. Start by figuring out what you can put aside every week. Whether it's $50, $20, $5 or some small change, the important thing is to start right now.

And if you're the sole wage earner with limited resources, then you might feel more comfortable with 12 months' worth of expenses saved. Saving thousands of dollars might seem impossible. But it's OK to start small—create a starter emergency fund—such as $500—and build up from there.