Why You Shouldn’t Keep Your Emergency Fund in a CD, Even With Rates as High as 5%

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Putting your emergency fund in the wrong type of account can be risky. Find out why CDs aren’t a good choice for emergency savings. [[{“value”:”

Interest rates came down recently, and they’re expected to fall even further by the end of the year. Certificates of deposits (CDs) are a way to protect your savings from declining rates. You can lock in an APY for a full CD term. Many of the top CDs listed here are still offering competitive rates of 4% to 5%.

It’s tempting to put your emergency fund in a CD. This might be the largest savings you have, so locking in a high rate for it seems like a good idea. But it’s actually a risky strategy that could end up causing financial stress and costing you money.

Why you shouldn’t put your emergency fund in a CD

Your emergency fund needs to be accessible at a moment’s notice. You never know when you’ll need it, after all. When you put money into a CD, you can’t withdraw it whenever you want. You’re supposed to keep it there for the entire CD term. For example, if you get a 2-year CD, then you can withdraw your money after two years.

That doesn’t work for emergency savings. Imagine your car breaks down and you need it repaired ASAP. You can’t exactly tell the mechanic you’ll pay the bill in two years when your CD matures.

If you need to take money out of a CD before the maturity date, the bank will likely charge you an early withdrawal penalty. This is normally a portion of your interest earnings, and the exact amount depends on the bank and the length of the CD. A 1-year CD might have an early withdrawal penalty of three months interest, a 2-year CD could charge six months interest, and so on.

The whole reason to open a CD in the first place is for a stable, competitive rate. If you need to withdraw money early and lose a big chunk of your CD interest, it defeats the purpose of opening one in the first place.

Keep your emergency fund in a high-yield savings account

The best place for your emergency fund is a savings account. Specifically, a high-yield savings account. This type of savings account pays interest rates well above the national average. In fact, some of these top-rated savings accounts are paying as much as or more than CDs right now.

When your emergency fund is in a savings account, you can withdraw it at any time. With online accounts, you’ll be able to transfer your money to your checking account if you ever need it. Some savings accounts even include an ATM card in case you need quick cash.

If you’re looking for an account for your emergency fund, consider the UFB Portfolio Savings Account. It has a 4.57% APY, no account fees, and an ATM card with access to fee-free withdrawals at about 91,000 locations. Click here to learn more and open an account today.

CDs are well-suited for savings you’re sure you won’t need for a certain amount of time. If you have money saved for a down payment on a home, but you’re not planning to start shopping until 2026, you could put it in a 12- or 18-month CD. For your emergency fund, and any other savings you could need without warning, a high-yield savings account is the better choice.

Alert: highest cash back card we’ve seen now has 0% intro APR into 2026

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

“}]] Read More