Your Emergency Fund Could Earn Great Rates if You Put It in a CD — but It’s Still a Terrible Idea

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Opening a CD with your emergency fund money could leave you stuck facing hard choices if you encounter an unplanned expense. Find out why. [[{“value”:”

Having an emergency fund with three to six months’ worth of living expenses is really important to protect your financial security. If you have a fully funded emergency account (or close to it), chances are this means you have a good amount of money in your savings account.

With so much money just sitting there, it may be really tempting to put some of it into a certificate of deposit (CD) right now. That’s because CDs are paying record high rates, with many options above 5.00%. Considering the fact that a 2.00% or 3.00% rate used to be considered great, today’s CDs are really tempting.

And it is indeed true that you could easily earn a great return if you opened a CD with your emergency savings — all while taking very little risk, since CDs are FDIC-insured. Despite this fact, putting your emergency savings into a CD is still a terrible idea. Here’s why.

Locking up your emergency fund is a recipe for disaster

While CDs may seem tempting, there’s a really important reason why you should never put your emergency fund into one: Certificates of deposit require you to make a commitment to keep your money invested for the entire CD term. And they enforce this requirement with a penalty.

CD terms typically range from three months to five years. But no matter what your term length is, you’re going to be expected to stick with it. Otherwise, you could pay a fee — early withdrawal fees on CDs typically range from 90 to 365 days of simple interest (although fees vary by bank).

This could mean you lose a lot of your gains, and even some of the money invested, if you have to make an early withdrawal. And when you have your emergency fund invested, making an early withdrawal is a very real possibility. After all, that money is supposed to be there for surprise expenses, and you can’t control when one of those surprises crops up.

There’s only one place your emergency fund belongs

The bottom line is, no matter how great the rate is on CDs (or any other investment, for that matter), there’s only one place to keep your emergency money: You should have it in an accessible savings account where you can take it out right away to cover unexpected costs.

Thankfully, that doesn’t mean giving up the chance to earn a great rate now. The Ascent has identified plenty of savings accounts that are paying rates around 5.00% or higher. While these rates aren’t guaranteed to last, they probably will for a while since the Federal Reserve is unlikely to cut interest rates with inflation at current levels. And you can get your money out whenever you need it.

So forget the idea of putting any emergency savings into a CD. Instead, check out the best savings account rates available, open an account that offers a great rate, and move your emergency money into it today. Then you can maximize your returns without risking early withdrawal penalties that could cost you in the end.

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