Life has a way of blindsiding you, breaking your knee caps, and then leaving you in a ditch to die, so it’s always good to have a plan if that happens. For real though, life happens. If you lose your job or have a costly, unexpected expense pop up you can be in a world of hurt if you didn’t plan for it. That’s where the emergency fund comes in. So I guess that answers the question; yes, you should have an emergency fund. The real question is how much do you need to have in it?
$5000? $10,000? There actually isn’t a specific amount. It comes down to what your lifestyle is like and what your monthly expenses are. It’s generally recommended that you have AT LEAST 2-3 months of expenses saved, but in some cases it may be better to have closer to six months. If you’re single, have a stable income, and don’t have any dependents you can usually get away with only the 2-3 months and be fine, but if you have people counting on you then you’re better off going closer to 6 months.
You should work on building this emergency fund before you start seriously investing because investments can be very risky and volatile. If your car breaks down and leaves you with a $1500 bill from the mechanic while your money is tied up in investments that can lead to a gnarly headache. You want the money for this fund to be easily accessible (liquid) and stored somewhere that is low/no risk. Even the stock market has periods of strong declines, so you might need the money during a time your investments are down 10+% and you aren’t in a position to wait for a market recovery.
The emergency fund should be stored in a high-yield savings account in order to provide you with a safe, easily accessible option to store your money. The best part is that your money will not only be safe, but will also grow. There are many highly reputable options for high-yield savings accounts so be sure to check some out to get the best deal. They function almost exactly like a traditional savings account but offer a wildly higher interest rate. Currently the rate for these accounts is about 1.5-2%% APY, which doesn’t seem like a lot, but it’s huge compared to the .01-.05% the bigger banks are offering. Bottom line: start that emergency fund so you don’t end up living under a bridge drinking Dos Equis.