A certificate of deposit (CD) is a convenient savings tool offered by banks and credit unions across the country. One of the qualities that makes CDs so enticing is that they have a higher interest rate than standard savings accounts. The annual percentage yields of CDs usually range between 2-5%, which means accountholders can benefit from a lot of passive growth.
Does this high interest rate make a CD the perfect place to store an emergency fund? No. Read ahead to find out why.
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CDs and Accessibility
When you open up a CD, you agree to deposit a lump sum into an account for a certain period of time. During that time, the account balance will become inaccessible to you. It’s locked away so that it can collect interest and grow undisturbed. You won’t be able to access your balance until the account reaches its maturity date (when the pre-set time period is officially over).
CD terms typically range from 3 months to 5 years (although, you may be able to find longer-term options available). So, you could be waiting for years before you can freely access your savings all over again.
CDs and Withdrawal Fees
Technically, you don’t have to wait until the maturity date to access your CD’s balance, but there will be a consequence for your impatience. You will have to pay an early withdrawal penalty.
If you face an early withdrawal penalty, you may be charged a portion of the interest that you would have earned if you had left the funds in the account. Depending on how early the withdrawal is, this portion of interest could be substantial. For instance, you could be charged 12 months’ worth of interest. This could undermine the entire purpose of putting your savings in a CD.
There are certain types of CDs that don’t charge accountholders early withdrawal fees. However, these types of CDs tend to offer lower interest rates to compensate for this accessible feature. So, your balance will not see the same growth as a more restrictive CD.
When Emergency Funds are Inaccessible
You’ll never know when you’re going to encounter an emergency expense. So, you’ll want to be able to access your emergency savings at any moment. That way, you can react to an emergency immediately after it happens and do your best to recover from it.
If you make the mistake of putting your emergency savings into a CD, you might be out of luck when an emergency strikes. Your savings are locked away. You’ll face a penalty for making an early withdrawal. Unless you have another savings account available, you might not have the liquid funds to cover the urgent expense whatsoever!
In that case, you will need to turn to a different payment solution to handle your emergency. One of the flexible online options you could look into is a personal line of credit loan. With an approved personal line of credit loan, you can request a withdrawal within your set credit limit and have it deposited into your bank account. Then, you can use those borrowed funds to cover your emergency expense as soon as possible.
Better Storage Options for Emergency Funds
You want your emergency savings to be liquid. So, store them in accounts that you can access at a moment’s notice. One option that you can try is a high-yield savings account. A high-yield savings account will have an APY ranging from 2-4%, which means you can see almost as much growth as a CD without having to lock your money away. Another option is a money market account (MMA). This savings tool will also have an APY of 2-4%, and it offers many payment options for accountholders.
These are payment options with MMAs:
- Debit card
- Cash withdrawal
- Transfer between accounts
- Transfer through P2P app
- Written check
While you can use a CD to boost your savings, you shouldn’t use it for emergency savings. Store your emergency fund somewhere else!