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Updated: Sep 07, 2023

Should You Keep Your Emergency Fund in a CD?

An emergency fund is supposed to be money that you've set aside for unexpected financial expenses. Find out whether it makes sense to keep your emergency fund in a certificate of deposit (CD) -- compared to an online savings account. Compare the pros and cons of this approach and how it could affects your ability to access your cash.
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One of your first priorities financially should be to build an emergency fund.

An emergency fund can mean the difference between handling an unexpected expense and going into debt.

Because you never know when you might get hurt, have your car breakdown, or incur some other large expense, you need to have easy access to the cash in your emergency fund.

Still, holding all that cash incurs a significant opportunity cost.

You could be losing out on potential interest earnings by maintaining an emergency fund. You might be tempted to put the money into a CD to try to earn more interest.

Find out whether that’s a good idea or not.

What is an Emergency Fund?

An emergency fund is an amount of money that you set aside for use only in emergencies.

If you’re saving up for a specific expense, like buying a new car, those savings are not an emergency fund.

Your emergency fund is a form of self-insurance against financial mishaps like medical bills or loss of your job.

How Big Should Your Emergency Fund Be?

Your emergency fund should be large enough to handle any reasonable, unexpected expense that life might throw your way.

Whether it be a car issue, medical bill, or something else, you want to be able to cover the full amount out of your emergency fund.

You also want your emergency fund to be large enough that you can live off the balance for a while if you lose your source of income.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

Depending on how secure your job is, a common rule of thumb is to keep 3-6 months of expenses in your emergency fund.

That amount will be enough to cover the majority of unexpected expenses.

It’s also enough to give you a good cushion should you lose your job. You can rely on your emergency fund to avoid going into debt while you search for a new job.

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Importance of a rainy-day fund

Emergency funds are important because they help you avoid debt. If you get hit with a large bill, you have two options: to pay it or to ignore it.

Ignoring a bill is a bad idea. Debt collectors will start calling you and trying to force you to pay. You might even be brought to court.

On top of that, your credit will be ruined. Clearly, ignoring your bills is a bad thing to do.

If you can pay the bill out of pocket, you should. If you can’t, your only option is to take out a loan to pay the bill.

The easiest way to take out a loan to pay an unexpected expense is to use your credit card.

Unfortunately, credit cards may charge incredibly high interest rates.

A small amount of debt can end up costing much more than you thought.

Consider this example:

You have an accident and are hit with a $2,500 medical bill.

You can’t afford the full amount, so you use your credit card to pay it off. Your card charges 19.99% interest and the minimum monthly payment is $75.

If you make just the minimum payment, it will take you 49 months, just over 4 years to pay off your medical bill.

You’ll pay just under $3,675 total, of which more than $1,150 will be interest.

The cost of your bill will be nearly 50% higher if you don’t have an emergency fund.

What is a CD?

A certificate of deposit (CD) is a type of bank account that offers you more interest than a savings account does, at the cost of flexibility.

They’re offered by almost any bank and are popular among people who want safe, guaranteed returns.

Lock in funds for higher rates

When you open a CD, you must first decide on how long you’re willing to commit your money to the CD. This is known as the CD’s term.

So, if you’re willing to commit your savings to a CD for 12 months, you can open a CD with a 12-month term.

Each month, you’ll earn interest on the money in your CD, and that interest will be added to your CD’s balance.

Over time, the interest will compound, accelerating the speed at which your CD’s balance grows.

The reason that CDs pay more interest than savings accounts is that you’re committing your money for the full length of the CD’s term. 

Knowing that you won’t withdraw your money for a specific period of time makes it easier for the bank to decide how much it can afford to lend out.

That’s why the bank incentivizes CD deposits with higher interest rates.

What that means is that if you try to withdraw money from your CD before it matures, that causes headaches for the bank.

For that reason, banks will penalize you for making an early withdrawal from a CD. Usually, this early withdrawal penalty will be a couple months of interest.

Shorter-term CDs charge lower fees than longer-term CDs.

When the CD’s term ends, the CD is said to have matured. At this time, you can make changes to the CD, or withdraw your balance.

If you don’t, most banks will automatically roll your balance into a new CD.

Why Store Your Emergency Fund in a CD

There are two arguments you can use to justify storing your emergency fund in a CD.


The first is the safety offered by CDs. Cash under the mattress can work as an emergency fund too, but it's not exactly safe.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC).

The FDIC insures the balance of CDs, up to a maximum of $250,000 per account ownership type.

In effect, it is highly unlikely that you'll lose the money that you deposit to a CD at an FDIC-insured bank.

Better rates

The second argument is that CDs offer a higher interest rate than checking or savings accounts.

Because your emergency fund will be a significant sum of money, that extra interest could be worth pursuing.

One way you can use a CD for your emergency fund is by setting up a CD ladder.

This strategy involves opening multiple CDs with different maturity dates so you have regular access to a portion of your emergency fund.

Why You Shouldn't Keep Your Emergency Fund in a CD

The main reason to avoid using a CD for your emergency fund is the fact that you could need to access the money at a moment’s notice.

By their nature, CDs are illiquid, which means they cannot be easily converted into cash.

It’s hard to get your money out of a CD unless your emergency happens to strike exactly at the CD’s maturity.

Keeping your emergency fund in a location where it's not financially tied up, means it will be easier to get the money when you need it.

If you do end up needing to withdraw your money from a CD before it matures, you will be hit with a penalty fee. 

This will only increase the cost of a financial emergency and you might not be able to afford that cost.

Finally remember that emergency funds are supposed to be safety nets, rather than investments.

Think of your emergency fund as a form of self-insurance.  Recall the example earlier that showed how much putting a $2,500 bill on a credit card can cost in interest.

If tragedy strikes and you're forced to pay for something you're not prepared for, it will cause a strain on your finances, as well as put added stress on you. 

The savings from avoiding debt will far outpace the lost interest from not putting your emergency fund in a CD.

The Best Place to Keep an Emergency Fund

The best place to keep your emergency fund is in an online savings account.

Online savings accounts offer far higher interest rates than savings accounts offered by physical banks.

Another benefit is that online accounts charge much lower fees and have lower minimum balance requirements.

You can start building an emergency fund with just a few dollars and feel safe that your savings won’t be eaten up by fees.

On top of that, online savings accounts make it easy to access your cash when you need it.

You can use perform a bank transfer to your checking account for withdrawal.

Or, some banks provide ATM cards that allow you to access cash directly from your savings account.

You won’t have to deal with the delay that comes with liquidating a CD.

Keep in mind that online savings accounts may charge excess withdrawal fees. This will only occur if you make more than six withdrawals in one statement period.

Hopefully, you don’t have bad enough luck that you need to make that many withdrawals in a month.

Open a CD after your emergency fund is set up

Once you’ve built up an emergency fund of 3-6 months worth of expenses, then you can consider opening a CD.

Again, we recommend using an online bank for your CD to get the best rates.


CDs are a great way to earn a safe return but aren’t great for emergency funds.

Getting money out of a CD can be expensive and time-consuming. When you need your money for an emergency, it doesn't make sense to have to wait to get it and pay a fee on top of it.

Instead, use an online savings account to hold your emergency fund and have your finances readily available when an emergency hits.