Is Now the Right Time to Move Your Emergency Fund Into a Short-Term CD?

As interest rates on short-term CDs start to fall, many savvy savers will start scrambling to lock in high rates before it's too late. That might be easy enough for those with ample cash on hand, but for those who only have savings earmarked for emergency expenses, that could pose a dilemma: Should you raid your emergency fund to lock in a high APY, or play it safe and keep your cash in an account you can access on demand? It's tempting, but here's why I wouldn't move your emergency fund into a CD. 

Why a CD isn't the best place for your emergency savings

Simply put, CDs aren't flexible enough to hold your emergency fund. In essence, they're a contract between you and a bank stating that you'll leave your money deposited for a certain period (like 12 months) in exchange for a higher-than-average APY. If you break your contract and cash out early, your CD provider will penalize you. 

And yes. You can lose money in a CD. 

The early withdrawal penalty on CDs depends on your contract, but it's usually equal to interest earned over a set period. For example, an 18-month CD may penalize you 180 days of interest if you withdraw before maturity. So, if you deposited $50,000 in this 18-month CD with a 5% APY, you would have to pay roughly $1,250 to cash out early (assuming your bank assesses interest daily). 

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Capital One 360 Performance Savings Member FDIC. APY 3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 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 On Capital One's Secure Website. Member FDIC.	3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.	$0	Open Account for Capital One 360 Performance Savings On Capital One's Secure Website.
Western Alliance Bank High-Yield Savings Premier Member FDIC. APY 4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website. Member FDIC.	4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	$500 to open, $0.01 for max APY	Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website.

Assuming you left your money deposited for the length of your contract, you would earn about $3,750. Not bad, but again -- you'd have to risk going that entire period without accessing your emergency savings. 

Now, here's a scenario that could really sting. Let's assume you got an 18-month CD with a 5% APY, and you agreed to an early withdrawal penalty equal to 180 days of interest. After three months, you need to access your savings, so you request an early withdrawal. You've earned three months of interest (about $625), but you would still need to pay a penalty equal to 180 days, or roughly $1,250. To go through with the early withdrawal, you would need to pay all of the interest you've earned already plus another $625 of your emergency savings. Yeah. Ouch. 

Keep in mind that most banks won't let you make a partial withdrawal, either. So, even if you only needed $5,000 of your $50,000, you would need to withdraw the full amount to access that sum. It's this inflexibility that makes CDs one of the worst places to store emergency savings, right below stocks and other equity investments.  

What about a no-penalty CD? 

Unlike traditional CDs, no-penalty CDs don't charge a penalty for early withdrawals. Typically, the CD provider will have a short no-withdrawal period, usually seven to 30 days, after which you get penalty-free access to your money.

In exchange for the no-penalty withdrawal, these CDs typically offer lower APYs. But, in today's high rate environment, you can still find many no-penalty CDs with rates above 5%. In fact, no-penalty CDs frequently rank high in terms of APY on the financial platform Raisin, with some currently reaching 5.40%. 

Given that they don't charge a penalty for early withdrawals, no-penalty CDs could be a decent place to store your emergency fund. Keep in mind that there will be some lag time between breaking your contract and transferring the money back into your bank account. But you won't pay a penalty, and you could earn high interest while you're at it. 

Should you open a CD for your emergency fund? 

All in all, emergency savings are meant to be accessible, which makes traditional CDs a risky place to store them. No-penalty CDs could be a way to get the best of both worlds -- they give easy access to money and guaranteed interest, but not all banks offer them or they may have limited terms if they do. It's certainly a good option, but I'd weigh it against the traditional places for emergency funds -- like a high-yield savings account -- before you venture out to get one.