What happens when you save your emergency fund to a CD?

According to a Pew Trust survey, 60% of Americans report experiencing an unexpected financial emergency in the past 12 months. So it’s clear that having an emergency fund is very important.

Most experts recommend saving three to six months’ worth of living expenses for unexpected expenses. But it’s not enough to just set aside this money for unexpected expenses; it also needs to be kept in the right bank account.

In some cases, especially considering today’s interest rates, it may seem prudent to keep your emergency fund in a certificate of deposit. But is this really a good idea? To help you decide, consider what happens when you put your emergency fund into a CD.

Get a higher rate of return for your emergency fund

There are great benefits to putting your emergency money in a CD. The best CD accounts can pay higher interest rates than savings accounts, and your money is protected (if you choose a CD from an FDIC- or NCUA-insured institution), so you don’t risk losing the cash you need in an emergency.

The national average savings account interest rate is 0.46%, while the national average return on 3-month CDs is 1.69%. Of course, it’s possible to get a much higher return on investment (ROI) by using a high-yield savings account or shopping around for more competitive CD rates. But overall, CDs generally offer a high ROI, as these national averages show.

Additionally, high-yield savings accounts have variable interest rates, whereas the rate of return is guaranteed for the life of the CD. So if interest rates go down, you could end up making less money (we’re currently in a market with unusually high interest rates, but interest rates are expected to go down).

The average monthly household expense in the United States is $5,577, so even an emergency fund with three months’ worth of expenses can exceed $15,000. With such a large sum of money, it seems logical to get the best rate possible. A CD might be the best way to do that without taking on a lot of risk.

You could end up being fined or in debt

The high interest rates you can earn by storing your emergency fund in a CD are appealing, but here’s the thing. Huge Disadvantages of keeping emergency money in a certificate of deposit.

To use a CD, you must commit to keeping your money invested for the entire length of the CD (which can be anywhere from 3 months to 5 years, as these are the most common CD lengths) . If an emergency occurs while there are still months (or years) left on your CD contract, you may be forced to incur penalties if you take out funds to cover unexpected expenses. there is.

If you don’t want to cash out your CD early, you may end up borrowing money to cover the bill instead. This is probably what you wanted to avoid by starting an emergency fund in the first place. And since the average interest rate on credit cards is 21.47%, this doesn’t make sense. The cost of borrowing will be much higher than the return you can get on even the most competitive CD.

The bottom line is that the downside of potential fines and potential debt outweighs the upside of getting a slightly higher return on investment. The goal of this fund is not to achieve maximum ROI, as this is not such an investment. Instead, having an emergency fund can give you peace of mind. You’ll know the big bucks are there when you need them. Savings accounts allow you to access cash without any repercussions. You should keep an emergency fund there.

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