Does Your Emergency Fund Belong in a CD?

It's a good idea to have an emergency fund with three to six months' worth of living expenses available to you. Having emergency savings means you'll be prepared for unexpected expenses and won't have to go into debt or face financial stress as you figure out how to cover them. 

But this often means you'll end up with a small fortune you need saved for emergencies. With so much money set aside, you may wonder whether you should put your emergency savings into an investment that can help you earn decent returns.

Since certificates of deposit (CDs) often allow you to earn a better return on investment than a savings account would, and they are FDIC insured, sticking your emergency savings into a CD could seem like a strategic choice. But is this really a good idea?

Does your emergency savings belong in a CD? 

There's a simple problem with putting your money into a CD. The issue is that CDs typically require you to tie up your money for a period. 

While there are some "liquid" CDs that don't impose a penalty if you withdraw your money ahead of your planned schedule, these aren't as common and often don't provide the best rate.  In most cases, the minimum CD term even for short-term CDs still lasts for a few months -- especially if you want a competitive rate.

And, the problem is, you don't know when you are going to have an emergency. You don't want to lock up your cash in a 3-month or a 6-month CD and then face a huge surprise expense in two weeks. You could find yourself forced to choose between going into debt to cover it or taking your money out of a CD and getting hit with a big penalty that reduces how much you have available to you.  

Your emergency savings is not an investment

The reality is, your emergency savings is not supposed to be an investment. The money is supposed to be there and ready for you when you need it so you can access it without worrying about paying additional costs when you experience a financial emergency.

There's nothing wrong with shopping around to find the best savings account offering the most competitive rates to put your emergency savings into. But you do not want to do anything with this money that reduces its liquidity or makes it more difficult or undesirable to take cash out of the fund when you need it.

Since a CD ties up your cash, it's simply not worth risking big losses due to an unplanned early withdrawal to get a slightly better rate than a savings account would offer. And you definitely do not want to put your emergency fund into a riskier investment, like a brokerage account you buy stocks in. 

Your emergency fund should be there to help you if and when something goes wrong -- so leave it in a safe bank account and find other money to invest to earn generous returns.