Is It Safe to Keep Your Emergency Fund in CDs When You Do a Ladder?

Recent data from SecureSave found that 63% of Americans couldn't cover an unplanned $500 expense. As a general rule, it's a good idea to aim for an emergency fund with enough money to cover at least three months of essential expenses -- whatever that means based on your personal spending.

The optimal place to put your emergency fund is a high-yield savings account. That way, you'll have access to your money at all times. But you may be tempted to open a certificate of deposit (CD). That's because CD rates tend to be higher than what savings accounts pay, and the rate is guaranteed throughout the term of your CD.

Your savings account might be paying you 4.5% today. But in a month or two, that rate might drop to 4.2% and keep dipping. If you lock in a 12-month CD right now at 5%, you're getting 5% for an entire year.

Of course, the downside to putting money into a CD is that you're not able to touch it during your CD's term. If you withdraw that money prematurely, you could face a costly penalty (the exact amount of which will depend on your bank and the length of your CD). That's why you'll often hear that if you're going to put money into a CD, it's best to take a laddered approach. This means dividing your money into different CDs that come due every few months so some of your cash gets freed up at regular intervals.

You may be wondering if keeping your emergency fund in CDs is a safe bet if you're going to set up a CD ladder. And the answer is that while a CD ladder minimizes some of the risk of CDs, it's still not a good idea to keep your entire emergency fund in a CD.

You need money in regular savings

If your high-yield savings account is paying 4.5% interest and you can snag a rate of 5% on a one-year CD, you may be eager to score that higher return. But remember, if you're going to open a one-year CD, you should fund that CD with money you don't expect to need or use within the next 12 months.

Your emergency fund, however, does not fall into that category, the reason being that you might need some or all of that cash at any time. So that's why putting your entire emergency fund into a CD is a poor choice. You could, however, consider putting some of your emergency savings into a CD if you're going to do a ladder and you have a larger emergency fund.

Let's say you ladder your CDs so you have one coming due every three months. Meanwhile, let's say you build a six-month emergency fund. If you keep at least three months' worth of living expenses in regular savings and have to deplete that cash, you'd conceivably have more of your money freed up in your CD ladder by the time that happens. So it's an option you can consider.

But the reality is that earning a little bit more on your money isn't worth landing in a position where you might have to cash out a CD before it matures. And it's not worth the stress of sweating the timing of when your money will free up. So while you could keep some of your emergency fund in a CD with a laddered approach, a savings account is still generally your best bet.

Your peace of mind matters more than a little extra interest

The whole purpose of having an emergency fund is to give yourself the peace of mind that you can cover unplanned bills. It's not worth forgoing that peace of mind for a slightly higher interest rate on your money.

RELATED: Emergency Fund Calculator

Let's say you're tempted to put $4,000 of your emergency fund into a 12-month CD paying 5%. That's $200 in interest after a year. But if your savings account is paying 4.5%, that's $180.

Of course, there's no guarantee that your savings account will keep paying that rate. But let's assume it does. In that case, is an extra $20 in the course of a year really worth running the risk of having to take a penalty for cashing out a CD early?

Probably not. So, again, while you could keep some of your emergency fund in a CD, for the most part, it's really best to stick to a savings account alone.