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Should I Put My Emergency Fund in a CD?

Having a robust emergency fund for unexpected expenses can give you the confidence to face life’s financial challenges. But where should you put your emergency money? Security is key, but it would be nice to earn interest on your savings too. Considering those goals, certificates of deposit (CDs) may come to mind as a place to store your emergency fund.

While a CD typically earns more interest than a standard savings account, there are some potential drawbacks to consider. Here’s what you need to know about the risks and benefits of putting your emergency fund in CDs.

Should I Put My Emergency Fund in a CD?

When an unexpected expense arises, you’ll need to access your emergency fund quickly. CDs may not be the best choice for this purpose because they usually require “locking in” your money for an extended period before you’re able to withdraw it.

When you deposit money in a CD, you agree to leave it there until the CD reaches maturity—usually in three months to five years, although you can find shorter and longer terms. A CD earns interest until maturity, at which point you can either withdraw your initial deposit plus accrued interest or roll the money into a new CD.

Most CDs charge a penalty for withdrawing money before maturity. For example, you might have to pay 90 days’ worth of any interest you’ve earned. In contrast, you can take money out of a savings account without paying a penalty or giving up any interest you’ve accumulated.

Unlike traditional CDs, a no-penalty CD (or liquid CD) allows you to withdraw money before maturity without paying a penalty. However, no-penalty CDs have some important limitations:

• You must wait at least seven days after opening your account to withdraw funds.
• You’re usually required to withdraw the entire balance (including interest).
• No-penalty CDs tend to have far lower annual percentage yields (APYs) than standard CDs, high-yield CDs or other savings options, such as high-yield savings accounts or money market accounts.

Getting money out of a CD can also be a more involved process than making a withdrawal from your savings account. That could be a problem when you need money fast.

Pros and Cons of Using CDs for an Emergency Fund

Before putting your emergency fund in a CD, carefully weigh the pros and cons.

Pros:

• Your money earns interest at a guaranteed rate. Unlike savings accounts, which have variable interest rates, most CDs have fixed interest rates. Locking in a high APY can benefit you if rates drop after you open a CD.
• CD laddering can help you stay liquid. You can get CDs with variable term lengths—for example, a three-month CD, six-month CD and 12-month CD—to maximize your earnings while giving you easier access to your cash.
• Your money is safe if federally insured. CDs at banks insured by the Federal Deposit Insurance Corp. (FDIC) or credit unions insured by the National Credit Union Administration (NCUA) are protected up to $250,000 per account holder, per account, in case of a bank or credit union failure.

Cons:

• You’ll risk early withdrawal penalties. Unless emergency strikes right as your CD matures, you’ll typically face penalties that can cost you a chunk of your interest—or even some of your principal.
• No-penalty CDs may require withdrawing your entire balance. You can take money out of a no-penalty CD starting seven days after opening the account without paying a penalty. In most cases, however, you can’t make a partial withdrawal—you’ll have to empty your account.
• Withdrawing money from a CD may take time. Getting money out of a savings account is simple. Just use the bank’s website, app or ATM or visit the teller window to transfer money to your checking account. Early withdrawal from a CD can be more complicated.
• You may not meet the minimum deposit requirement. Many CDs require a minimum initial deposit of $500 to $2,500 and up. Savings accounts can often be opened with no initial deposit or a very small deposit, such as $25.

Other Places to Keep Your Emergency Fund

There are plenty of other safe places to stash your emergency cash. All of the options below are federally insured up to $250,000 per person, per account, if opened at FDIC- and NCUA-insured banks or credit unions.

Traditional savings accounts have variable APYs, fluctuating based on the Federal Reserve’s benchmark interest rate. The downside to savings accounts is their relatively low APY.

High-yield savings accounts also have variable interest rates and limitations on withdrawals, but offer significantly higher APYs. Many high-yield savings accounts are with online-only banks, so you won’t have a physical branch to visit. However, it’s generally easy to withdraw money from a participating ATM or transfer it to a checking account.

Money market accounts, available at most banks and credit unions, are a hybrid between checking and savings accounts and usually boast higher APYs than traditional savings accounts. Money market accounts let you write a limited number of checks, so when an emergency strikes, you don’t have to transfer money from your savings account to your checking account.

Whether you’re opening a savings account, money market account or CD, be sure you understand the account’s terms, including any fees, minimum deposit or minimum balance requirements and penalties.

The Bottom Line

Without an emergency fund, you might end up paying unexpected expenses with credit cards, a bad habit that can lead to high-interest debt. Automating your savings can help build your emergency fund, providing peace of mind that you can handle whatever life brings. Another smart financial move: Sign up for free credit monitoring through Experian. This will allow you to keep tabs on your credit report and get alerted to potential problems so you can take action immediately.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions for your future.

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