emergency fund

Can You Use CDs for an Emergency Fund?


3 April,2012

One of the essentials for a solid financial situation is the emergency fund. You want to be able to draw on saved money in the event that a difficult and unexpected situation arises. Even though you know that you need to budget money for your emergency fund each month, it can be difficult for some folks to get excited about the prospect of earning such low interest rates. After all, the average savings account pays a fairly meager yield.

If your are looking for a way to boost your yield, you can consider using certificates of deposit. CDs can offer higher yields than savings accounts in some cases, helping your money grow. However, you have to be careful, since CDs have characteristics that can make them difficult to use as emergency funds.

Problems with CDs in Your Emergency Fund

The main thing to remember about an emergency fund is that it isn’t meant to be a money-maker. Money in an emergency fund is supposed to be safe, liquid, and accessible. That’s what makes it so useful in a tricky situation. You pay for the safety and accessibility of your money with lower yields.

CDs, unfortunately, don’t display the characteristics that make for a good emergency fund. Instead, they are fairly illiquid, since you can only access them (without penalty) when they have matured. You can end up with a higher yield on a CD than you would with a savings account, but that higher yield means that you money is tied up. The difficulty in accessing your money without paying penalties means that CDs may not be your best choice.

Using Laddering to Alleviate some of these Issues

One way you can alleviate some of the issues related to using CDs as part of your emergency fund is to carefully plan a ladder. It’s possible to plan a CD ladder out for 18 months or more, using CDs that mature every month. This way, you know that every month you will have access to your money. If you don’t need the money, it can be rolled into another CD. The longer the term, the better off you are, so it can make sense to create a ladder that goes out to the point where you receive a higher yield.

Of course, you still have the accessibility problem. However, you can keep a smaller amount in a very accessible account. This way, you have enough to cover minor emergencies, such as repairs. This money can also hold you over until you are able to get money from a maturing CD later on.

With a carefully planned ladder, you can use CDs as a part of your emergency fund. However, be aware that your best CD rates are still going to come on longer-term CDs. So consider your needs, and consider how much access you need to your money — and when you need it. Make sure that you plan out your emergency fund so that you have everything ready when the unexpected arrives.