Here's Why I Wouldn't Keep My Emergency Fund in a CD

Keeping your savings in an interest-earning bank account is a smart move. As your money sits in the bank, you'll earn extra cash and your balance will grow. But it's important to consider how and when you plan to use your savings so you can choose the right type of account. 

I have spent the last few years building an emergency fund, and I keep it in a high-yield savings account. Here's why I wouldn't keep my emergency fund in a CD.

You can lock in interest rates with a CD

A certificate of deposit (CD) is a bank account that earns interest. Some savers like to keep a portion of their savings in CDs because they benefit from a guaranteed interest rate for a set time. When interest rates are high, you can lock in rates by opening a CD. 

Here's how a CD works: You earn interest at a set rate for a fixed period, depending on the terms of the CD. It's common to see CDs with terms of six months, one year, two years, or more. You'll pay penalties if you withdraw your money before the term ends. 

If you plan to use your savings in the coming months, choose an investment vehicle other than a CD. Unless the money is stashed in a no-penalty CD, you'll be charged fees when you take the money out, which could be a sizable chunk of the interest you've earned. 

Any funds you may need to access sooner should be kept in a different type of bank account. A high-yield savings account is a good option for the savings you may need to spend soon. 

Consider keeping your emergency fund in a HYSA 

Emergencies happen when you least expect them. You'll want to be able to access the money in your emergency savings fund quickly and avoid paying additional fees when withdrawing it. 

I keep my emergency fund in a high-yield savings account to avoid penalties. I can easily access my money quickly and earn interest while the money remains in the account. 

If you're building an emergency fund, I recommend a similar approach. While keeping your savings in your checking account may feel tempting because the money will be right there when needed, most checking accounts don't pay much interest, if any, so you'll miss out on extra income. 

Many online banks offer high-yield savings accounts with competitive interest rates. You can easily transfer money from this type of account to your checking account when necessary. 

I have an Ally Savings account, which earns a high APY, and transfers can take up to three business days. However, transferring money from my high-yield savings account to my checking account usually takes one to two business days. So I keep some extra cash in my checking account as an added buffer, but keep most of my savings in my high-yield savings account. 

Be strategic when deciding where to stash your money

Congratulations on working hard to reach your savings goals. Having extra money available for an unexpected bill or costly emergency can make a stressful situation less upsetting. Even if it takes several years to build your emergency fund, it's wise to prioritize this goal. Be strategic about where you keep your savings to earn interest and avoid extra fees. If you're considering opening a CD for savings you don't plan to use soon, review the best CD rates.