By Sabrina KarlYou’ve heard the advice: Build an emergency fund that equals 3 to 6 months of your living expenses to cushion you through financial storms, rather than let them batter you.
But putting that money in a simple savings account isn’t your only option, and with interest rates so low right now, higher-paying CDs can be appealing. In addition, some people find money in easy-to-access savings accounts to be too tempting.
Certificates of deposit pay higher interest in exchange for keeping the money on deposit for a set number of months or years. Having to “lock” your money in place might make CDs seem unsuited for an emergency fund. But these three pro tips make it work.
First, choose a CD that pays a high rate but also has a low early withdrawal penalty. This is what the bank will charge if you cash out early, and it usually just reduces your interest payment. But banks’ penalties range widely, so look for a mild one, understanding that if you must tap this money early for something critical, it’s an acceptable expense.
Second, don’t put all of your emergency money in CDs. If your fund is, say, $25,000, consider keeping $5,000 in a savings account and the other $20,000 in CDs. The split is up to you, but the idea is to keep some easy, no-penalty funds available for smaller emergencies.
Three, open multiple certificates, such as four CDs at $5,000 each, or five at $4,000, rather than one $20,000 certificate. Multiple smaller CDs allows you to cash in only what you need, rather than triggering a bigger penalty on one large CD.
A savings account/CD hybrid emergency fund is a smart way to earn a little more interest, keep withdrawal temptation at bay, and still keep yourself covered for minor surprises.