Should You Put an Emergency Fund in a CD?

Life has a way of throwing expensive curveballs.

You want to be prepared.

It’s not a question of if you’ll have an unexpected expense, but rather when — hence the importance of establishing and maintaining an emergency fund.

Some people are old-school and keep their emergency cash under the mattress or in a shoebox. But while this approach keeps funds close, it doesn’t provide the most protection. And it also robs you of any opportunity to earn interest.

The bank is one of the best places for your emergency fund.

Yet, another question remains.  Is your cash better in a savings account or a certificate of deposit (CD)?

Learn about the differences of these two common types of bank accounts to see which one is more appropriate for an emergency fund.

The Point of an Emergency Fund


Emergencies don’t happen every day.

So it’s easy to downplay the value of saving for an unexpected expense or a rough patch. You might put it off until your income increases. Or only save a small percentage of your earnings.

But even if you’ve been fortunate thus far, everyone faces an emergency at some point. Not to say you should obsess over situations that might never happen. All the same, having an emergency fund can provide peace of mind.

For example:

Car repairs, home repairs, medical bills, and last-minute travel can cost hundreds or thousands of dollars.

If you don’t have enough money in savings, you could end up relying on a credit card to get through these emergencies.

And if you’re unable to pay off your credit card, you’ll pay interest charges for each month that you carry a balance. This makes an emergency even more expensive.

An emergency fund also comes in handy after a job loss. The reality is, there’s no such thing as true job security. Even if you work hard and give your employer 110 percent, you’re not immune to job loss.

If you’re laid off or fired, it might take months to secure new employment. A savings account, however, can help you weather these storms.

What is a Certificate of Deposit?

Keeping emergency funds in the bank is a chance to earn interest on your deposit.

Naturally, you want to get the highest return on your monty. For this reason, you might consider putting your emergency fund in a CD. This is a type of savings account with one primary difference.

Certificate of deposits are also time deposits.

In other words:

You agree to leave your money in the bank untouched for a certain length of time.

CD terms can range from six months to 10 years, on average.

In exchange for leaving your cash in the account, the bank rewards you with a higher interest rate. At the end of your CD term, you’ll get back your original deposit plus interest.

The interest rate on a CD varies, but it’s more than the interest rate on a savings account. The longer your CD term, the higher your rate, too.

But while a certificate of deposit is an attractive product, it might not be the best place for your emergency fund.

Early withdrawal penalties

Remember, an emergency fund should provide quick access to cash for unexpected expenses.

With a CD, you can’t quickly pull money from the bank on an as-needed basis.  But you can do this with a savings account.

When you open a savings account, you are given a debit/ATM card which can be used to withdraw money from an ATM. You can also withdraw cash from your savings account inside a branch or transfer funds electronically.

Accessing cash in a certificate of deposit isn’t as simple.

If you want to pull money from a CD, it may take a day or two to access your money. This can be problematic when an emergency arises and you need same-day cash.

CDs are designed for long-term savings. Therefore, the idea is to avoid needlessly dipping into your account. This ensures that you’re able to maximize the growth of funds.  

Of course, this is your money. So you’re certainly free to request an early withdrawal.

This involves withdrawing money from your CD before the end of your term. But banks normally impose an early withdrawal penalty, often the equivalent of several month’s interest.

Some banks offer no-penalty CDs.

This allows you to withdraw money early without paying a fee. But while convenient, the downside is that these certificates of deposits come with a lower interest rate. This reduces your earnings and slows the growth of your account.

Why Use a Savings Account for an Emergency Fund?

There’s no rule that says you can’t use a CD for your emergency fund. But a savings account is usually a better option.

A savings account keeps your money liquid so you can access it whenever necessary.

Another benefit of a savings account is that you’re able to open the account with limited funds. Some certificate of deposits require a minimum opening deposit between $500 and  $1,000.

If you’re just starting an emergency fund, you may not have this amount of cash available. On the other hand, many savings accounts allow you to open an account with only $25.

Keep in mind that if you withdraw cash from a savings account, you’re limited to a certain number of online, electronic, and telephone transfers.

If you initiate more than six of these transfers in a statement cycle, your bank may charge a fee.

There’s no withdrawal limit when you take cash from an ATM or get cash from inside a branch.

A savings account may seem like the inferior option because these accounts don’t offer the highest rates.

The good news:

You can find better rates with a high-yield online savings account.

To maximize and grow your emergency fund faster, set up regular transfers into your account after each payday. This approach puts your savings on autopilot.

Also, ask your bank about automatic savings programs.

Some banks have a savings round-up program. For every purchase you make with a debit card, the bank rounds up purchases to the nearest dollar and deposits the change into your savings account.

Other banks will deposit $1 into your savings account each time you make a purchase with a linked debit card.

Another option to maximize your return is to skip a savings account and open a money market account. Your money is also more accessible with this type of account compared to a certificate of deposit.

But again, money market accounts limit accountholders to six withdrawals per statement cycle. Plus, opening a money market account may require a minimum opening deposit of $100, $500, $1000, or more.

How Much Should You Keep in an Emergency Fund?

The general consensus is to have a minimum of three to six month’s worth of income in your emergency fund.

But don’t stop saving once you hit this goal. The more you have stashed away for the unexpected, the better.

Understandably, you can only save what your income allows. Be mindful that starting an emergency fund may require a few sacrifices on your part. Some people feel that they don’t earn enough to save.

But the truth is:

Many people do earn enough.

The problem is that they’re living beyond their means.

Initially, you might not be able to save 10 percent of your monthly income for emergencies, especially if you’re also saving for retirement.

In this case, start small and save 5 percent of your income each month, with a goal of gradually increasing your savings deposits over the upcoming months or years.

Re-adjust your budget to see where you can cut back on spending, and then put the savings into your emergency fund.

If you get a raise, funnel the extra money on your paycheck into savings.

You should also save any free or surprise money you receive during the year. This can give your emergency fund a strong boost. Funds might include work bonuses, gift money, and perhaps a tax refund.


There’s no set amount to have in an emergency fund. The bottom line is that some savings is better than none. Do what you can afford. If need be, start by aiming for a $1,000 emergency reserve.

Even though a CD might not be the right match for an emergency fund, you can still open one if you like the idea of earning a higher rate and establishing a long-term savings.

What you can do is keep a percentage of your cash liquid in a savings account at your bank. This account will function as your emergency fund. You can then deposit another percentage of your cash into a CD.

This way, you’re able to enjoy the best of both worlds. You’ll keep some of your cash available for surprise expenses, while earning a higher interest rate on cash you’ll use for future goals.

When to Use Your Emergency Fund

You understand the importance of an emergency fund and have done a great job in setting one up.

Financial security has been achieved.

It’s important to make sure you don’t spend your emergency fund on the wrong thing, reserving it for true emergencies.

Learn how to identify the correct situation when it makes sense to use an emergency fund (and when it doesn’t).

How Not to Use an Emergency Fund

Here are a few examples of things you shouldn’t use your emergency fund on.

Frivolous Spending

Spending money can be fun. Fancy meals out, a new outfit, or a shiny electronic gadget can all be very tempting.

This temptation can get even worse if you have friends who invite you out for a meal or who are constantly upgrading their own gadgets, making you feel like you’re getting left out.

If you have a lot of money in your emergency fund, it might not seem like a big deal to spend a bit of it on something fun. This is a dangerous precedent to set. One small splurge can quickly become two small splurges, and then three. Soon enough, you’ll find yourself with no emergency fund at all. If a real emergency comes around, you won’t have any way to cover the expense.

This is why setting a budget based on your income is so important. By budgeting for spending on fun, you can stay within your means while having guilt-free money that you can use on whatever you’d like.

Fear of Missing Out on Sales, Deals, or Discounts

Companies, whether they be clothing stores or car dealerships, constantly advertise deals, sales, and discounts on their products. No matter how great a deal seems, it’s not worth spending your emergency fund because you’re afraid of missing out. More likely than not, the product you want will go on sale soon enough.

If something is on sale for an event like Black Friday, you should think about that before the day of the sale comes. Set aside money specifically for use on the day of the sale, that way you have extra cash to go shopping and take advantage of the discounts.

Paying for Home Improvement That Can Wait

Owning a home is like having a constant DIY project to work on. If you have a lot of cash in the bank, it can be tempting to start a new home improvement project, whether it be making an addition, repainting a room, or buying new appliances.

You shouldn’t use your emergency fund for this purpose for a few reasons.

Most obviously, because home improvements, short of repairing catastrophic issues, isn’t an emergency. Emergency funds are for emergencies, not unneeded spending.

Second, even the best-laid home improvement plans can go awry and a small project can quickly become a big one. You don’t want to commit a small part of your emergency fund to a project only to find you need to spend all of your savings to finish it.

A New Car if Your Current One is Fine

Having a car is essential for most Americans. Public transit in all but the largest cities leaves much to be desired and even then it can be inconsistent. You need some way to get to and from work and to be able to travel around.

Cars can also be a fun hobby for many people. It’s not unusual to dream of owning a luxury car or to want to upgrade from your current model. Still, if your current car runs fine, you shouldn’t spend your emergency fund on a new one. Not only will you lack savings to handle true emergencies, you’ll also lock yourself into a new, and possibly expensive, car payment.

When it Makes Sense

Here are some reasons you might use your emergency fund.

You Need a Livable Shelter

One of your first priorities should be having a place to live. If you find yourself without livable shelter for whatever reason, tapping your emergency fund to find somewhere to stay is a good idea. If your roof starts leaking or your utilities are going to be shut off, you should use your emergency fund to rectify the situation.

Utilities like cable, internet, or subscriptions like Netflix are not essential, so you shouldn’t use your emergency fund to cover those bills. Focus on what you truly need: a good roof, electricity, and heat.

You Need to Get to Work

If you don’t have a way to get make money, you won’t have a way to pay your bills or rebuild your emergency fund after you deplete it. If your car breaks down, using your emergency fund to pay for the repair makes perfect sense. If you lose your job because you didn’t fix the car, your emergency fund wouldn’t last long, so using it to ensure you keep your job is a good idea.

You Need to Find a Job

Relatedly, if you need to spend money so you can find a job, do so. This can mean covering your living expenses, which you should reduce to the bare minimum, or it can mean buying an adequate outfit to interview in.

It might also mean purchasing transportation to get to and from interviews or to get the necessary education to find a job. Don’t spend too much on things that aren’t truly necessary. A coding boot camp, for example, isn’t guaranteed to get you a job. But, for example, if you don’t own any formal clothes, buying a shirt and tie to use for interviews would be a good investment.

You Need to Stay Healthy

The most important thing you have is your health. If you’re unhealthy, your quality of life will decrease dramatically. Of course, your ability to earn money to sustain your lifestyle will also decrease if you are unhealthy.

If you get sick, have an accident, or some other health issue comes up, spend your emergency fund on the required treatment. Visit the doctor, get the recommended tests, and do whatever you can to get healthy again. You can worry about rebuilding your emergency fund when you’re better.

The Size of Your Emergency Fund

Once you’ve decided to build an emergency fund, you have to decide how large an emergency fund you need.

A good rule of thumb is to start by saving up $1,000. This is a relatively small amount, but it is enough to handle most minor issues that pop up, like a car repair or unexpected bill.

Once you’ve built your initial emergency fund, focus on paying off high-interest debt. Depending on your risk tolerance and willingness to pay interest, paying off any debt that charges more than 4-6% interest should be your target. You can continue paying the minimum on your lower interest debt.

After you’ve eliminated your high-interest debt, go back to building an emergency fund. Depending on a variety of factors: how many dependents you have, your level of job security, and how hard it would be to find a new job, aim to have 3-6 months’ expenses in your emergency fund. So, if you spend $2,000 a month, aim to have $6,000-$12,000 on hand at all times. This amount will help you weather the storm if you wind up losing your job and have to find a new one.

Where to Keep Your Emergency Fund

There are a few options to choose from when deciding where to keep your emergency fund.

Online Savings Account

The simplest option is to keep your money in an online savings accounts. These accounts rarely charge fees and pay great interest rates. This means that your money will grow over time and helps fight against the effects of inflation.

Online savings accounts sometimes make it difficult to make withdrawals, but if you choose the right bank, you can make electronic transfers without much trouble.

Money Market Account

Money market accounts combine the benefits of savings accounts and checking accounts. They pay a good rate of interest and give you the ability to write checks against the account. That makes it easy to access the money when you need it. As a bonus, many banks offer debit cards with their money market accounts.

The greatest downside of money market accounts is that they tend to have high minimum deposit requirements.

Money Market Funds

Not to be confused with money market accounts, money market funds are offered by investment brokerages as a way to store extra cash. These accounts are not insured by the FDIC, but they can pay a great interest rate. Some brokerages offer rates higher than online savings accounts.

Moving money out of a money market fund is easy. Some brokerages even let you write checks against the account.


Building an emergency fund is an important step in everyone’s financial life. Once you’ve taken that step, make sure that you don’t spend the money frivolously, saving it for true emergencies.