Should You Move Your Emergency Fund Into a CD Before Rates Drop?

A certificate of deposit (CD) is one of the safest places to put your money. You can also get an impressive return with one right now -- the best CDs are offering rates of over 5%.

Experts have been predicting that CD rates will drop at some point this year, though. While it isn't a sure thing, it's a strong enough possibility that you probably shouldn't wait too long if you want to open a CD.

If you have a large emergency fund, you may have thought about moving that to a CD to lock in a high rate. Even with the benefits that CDs offer, they're not a good fit for emergency savings.

Why you shouldn't put your emergency fund in a CD

Your emergency fund is your financial safety net for anything life throws at you. If your dog gets sick, you can pay the vet out of your emergency fund. If you lose your job, it's how you can pay your bills until you find a new one.

That's also why it's recommended to have three to six months of living expenses in your emergency fund. You can use it to get by during an extended emergency, like a job loss.

Because you never know when an emergency will happen, your emergency fund needs to be easily accessible. CDs are anything but. A CD lasts for a fixed amount of time: Six months, one year, five years, etc. You decide that when you open the CD.

If you put your emergency fund in a 3-year CD, and an emergency happens after six months, you'll be in a tough position. You'll need to make an early withdrawal and pay a penalty. The early withdrawal penalty depends on the CD, but it's usually at least a few months of interest. And earning that interest was the point of opening the CD in the first place.

The exception to the rule

There is one type of CD that can work for your emergency fund: no-penalty CDs. A no-penalty CD allows you to take out money without paying an early withdrawal penalty.

Rates tend to be lower on no-penalty CDs than on regular CDs. That's the price you pay for greater flexibility. But there are some banks offering high-paying no-penalty CDs. Marcus by Goldman Sachs is one option. At the time of this writing, it has a 7-month no-penalty CD with a 4.70% APY.

Before you choose this type of CD for your emergency fund, check the withdrawal rules. This still isn't a savings account that you can access at any time. The bank may only allow a limited number of withdrawals during the CD term.

The best option for your emergency fund

For most people, high-yield savings accounts are the best place to put an emergency fund. These are savings accounts, typically from online banks, that pay rates well above the national average. There are even high-yield savings accounts offering APYs of 5% or more right now.

The drawback with a savings account is that the APY can change. It's not guaranteed like a CD's rate. But you can withdraw from it at any time, and that's what you need for your emergency fund.

Money market accounts are another option. These combine the features of savings accounts and checking accounts. Their rates are comparable to high-yield savings account rates, but they also come with checks and debit cards. You may want to go with a money market account if you'd like to be able to withdraw cash and write checks from your emergency fund.

Emergency funds and CDs don't mix. CDs are great for securing a high rate on savings you won't need anytime soon. But there's no way to know when you'll need your emergency fund, so it should be in an account where there are no penalties for making withdrawals.