Never Put Your Emergency Fund in This Bank Account

Thanks to a string of Federal Reserve interest rate hikes in 2022 and 2023, interest rates on consumer financial products are up across the board. (The two don't move in concert, but do trend in the same direction.) This has had a negative impact on the bottom line of those who need to borrow money -- but if you've got money saved in the bank, you stand to profit from those rate hikes.

Certificates of deposit (CDs) are one type of bank account that is paying out higher APYs right now -- you can find them with rates of 5% and higher. And the rate you get is locked in for the entire CD term. So if the Federal Reserve cuts rates next month and CD rates fall overall, your money is still earning the high rate you started with.

Despite this, CDs are not a fit for every financial situation. In particular, they're a terrible place for your emergency fund, if you are fortunate enough to have one. Here's why -- and where you should put that money instead.

The problem with CDs

I can't deny that CDs have some pretty sweet benefits. But they also have restrictions that make them a poor choice for any money you don't have a short and well-defined timeline for. And your emergency fund is money that you likely don't have a set use for; it's meant to be there when you have a medical bill that insurance doesn't cover, or you get a flat tire, or any number of expensive unplanned mishaps that aren't part of your budget.

Our Picks for the Best High-Yield Savings Accounts of 2024

Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
American Express® High Yield Savings APY 4.25% Rate info 4.25% annual percentage yield as of July 1, 2024 Min. to earn $1 Open Account for American Express® High Yield Savings Member FDIC.	APY 4.25% Rate info 4.25% annual percentage yield as of July 1, 2024	Min. to earn $1
Citizens Access® Savings APY 4.50% Min. to earn $0.01 Open Account for Citizens Access® Savings Member FDIC.	APY 4.50%	Min. to earn $0.01

When you open a CD, you agree to leave your money in the account for the duration of the CD's term (often between three months and five years) in exchange for earning that high APY for the entire term. If you need to pull your money out early, you'll be penalized with an early withdrawal fee. The fee amount depends on your bank, but you can expect to lose at least a few months' worth of interest earnings on a shorter-term CD, and perhaps a year or two of interest if you have a longer-term one.

And while up to $250,000 of your cash in a CD is protected against bank failure thanks to FDIC insurance, you can still lose some of your principal balance due to an early withdrawal fee. Let's say that you open a 1-year CD, and the penalty for withdrawing early is three months' of interest earnings. But just two months into the CD term, your car breaks down and you need the money to have it fixed. Your early withdrawal fee won't be covered by the interest you've earned so far, so you end up with less money than you started with. Not ideal -- but a good illustration of why CDs aren't a great place for money you could need anytime.

Where does your emergency fund belong?

I'm not here to state a problem and then not give you a solution! Thankfully, there are two bank account types that are excellent fits for your emergency fund.

The best high-yield savings accounts are currently paying APYs around the same as what you could get with a shorter-term CD -- with the caveat that rates are variable and subject to change. But in terms of ease, bank accounts don't get any simpler. You can add or withdraw money any time you like (often by transferring it to a linked checking account -- the highest-paying HYSAs are offered by online banks, which means more hoops to jump through for cash access).

Want easier money access and a similarly high (but still variable) APY? Look to the best money market accounts. These offer debit cards or check-writing privileges, giving you just one step to pay an unplanned bill. Both account types come with FDIC insurance and give you the flexibility you need to keep your cash safe and growing while not penalizing you for spending it on your own schedule.

Don't use a CD for your emergency fund. It would be a real bummer to find yourself facing a surprise expense and losing some of your money to an early withdrawal fee in the process.