Is a CD a Safe Place for Your Emergency Fund?

Your emergency savings should be in the bank. But does a CD count?

You never know when life might throw you a financial curveball. You could wake up one morning to a car that won't start, encounter a costly home repair, or land in the hospital with a trail of expensive bills to cover. Or you could lose your job and have to go without a paycheck for weeks or even months.

That's why it's so important to have an emergency fund. Ideally, you should have anywhere from three to six months of essential living expenses tucked away for a rainy day (Use our emergency fund calculator to see how much you should save). And generally speaking, a savings account is the best place to store that cash. A savings account makes the cash instantly accessible, and the principal amount you save is protected. By contrast, if you put your emergency fund in an investment account, it can lose value when market conditions decline, and if you take a withdrawal during a downturn, you'll have less money at your disposal. 

Of course, the one downside of keeping your money in a standard savings account is earning limited interest on it. Even higher-yield savings accounts today are paying under 2%. 

But what about a certificate of deposit? With a CD, you can earn over 2% these days, which is a bit more enticing. Still, it may not be the best place for your emergency savings either.

Should your emergency fund go in a CD?

The main reason savings accounts have an edge over CDs when it comes to emergency cash is that they're more flexible. With a savings account, you can access your money at any time without penalty. On the other hand, with a CD, you commit to locking up your money for a preset period of time, whether it's six months, one year, or longer.

True, with CDs you secure a higher interest rate on your money than what a savings account pays. But if you cash out your CD before it comes due, you'll be penalized to the tune of several months of interest for raiding that account early. 

As such, a traditional savings account may still be a better choice for your emergency fund. You'll earn interest while your money is in that account, and you don't risk losing that interest at any point.

That said, one option you can consider is putting some of your emergency fund into a regular savings account, and the rest into a CD. That way, you can access a chunk of your savings penalty-free at all times. 

Another option? Put part of your emergency stash into a regular savings account, and put the rest into a CD ladder. With a CD ladder, you divvy your money up into several CDs that come due at different times so you have access to your cash at different intervals. Say you have a $12,000 emergency fund. You might choose to put $6,000 into a regular savings account, $3,000 into a six-month CD, and $3,000 into a one-year CD. That way, some of your cash won’t be locked up for too long.

Putting your emergency fund in a CD is still a much safer bet than investing it -- but it's not as flexible as a regular savings account. However, while losing a few months' worth of interest isn't a great thing to have happen, it's also not the worst penalty out there. So if you decide that you can't bear to watch your emergency cash earn minimal interest in a savings account, a CD may be a reasonable choice.