Introduction

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.

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.

Pros and Cons of Using CDs for an Emergency Fund

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

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

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.

Money Market Accounts

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.

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.

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