I Just Got Laid Off. Should I Cash Out My CD Early?

While the U.S. economy is in pretty good shape these days, that doesn't mean layoffs didn't hit the news earlier this year. And the reality is that you never know when layoffs might happen at your place of work, whether due to industry shake-ups, some sort of internal restructuring, or fiscal woes.

Losing your paycheck is not an easy thing to deal with -- not when you have bills to pay immediately. So if you're laid off and have money in a certificate of deposit, or CD, then you may be inclined to cash it out so you can cover your expenses.

But cashing out a CD before its maturity date usually means facing a penalty. So is that penalty worth taking? In some cases, it could be.

READ MORE: What Is a Certificate of Deposit (CD)?

When your early cash-out penalty is the lesser of two evils

The penalty for taking an early CD withdrawal depends on your bank. There are no universal rules when it comes to imposing these penalties, so you'll need to review the terms of your specific CD to see what sort of financial hit you may be looking at for an early cash-out.

As one example, Capital One imposes a penalty of three months of interest when you cash out a CD early with a term of 12 months or less. So if you have a 12-month, $10,000 CD with a 5% APY, you may be looking at about a $125 penalty for an early withdrawal.

Now, that's a sum of money you probably don't want to give up. But think about it this way: What if you have money in the bank outside of your CD, so instead of taking your $10,000 to pay your bills, you instead have to charge $10,000 in expenses on a credit card with an 18% APY?

If it takes you one year to pay off that card balance, you'll be looking at losing around $1,000 to interest. That's a much bigger financial hit than a $125 penalty for cashing out a CD before it comes due.

Make sure you're all set for emergencies before opening a CD

It's easy to see why you might have to tap a CD to cover your bills after a layoff. But a better bet is to not put yourself in that position.

In fact, you really should not put money into a CD until your emergency fund is complete. And by "complete," we're talking about having enough money in the bank to cover three months of essential expenses at a minimum.

Once your savings account balance gets that high, then yes, by all means, feel free to put money into a CD to potentially score a higher and guaranteed APY on it. But always make sure you have enough money in regular savings to cover your bills for a period. That way, you may not have to lose any money to penalties if your job suddenly goes away, or if you encounter any other sort of unplanned expense that requires a large pile of cash.