You’ve finally filled up your emergency fund, now what? I would recommend putting it in an account that you are incentivized to not touch it for a while.
Certificates of Deposits, or CDs, are a one way to do that. With this account, your rate is locked for the period you choose. For example, if you choose a 12 month CD, it doesn’t matter what the market rate is, you LOCK the rate for 12 months. That can work for and against you but that is the consideration here.
Alternatively, you can put it in a traditional savings account, but you’ll find that they pay close to zero percent. CD’s offer higher rates because you are essentially committing to keep the money at the bank for a while. What that does for the bank, is it ensures to them to they have money for the loans they are going to make during that period.
I opened a no penalty CD in September 2019 for 1.98% interest, 2.00% APY and in May 2020 that rate is 1.01% interest and my rate is still locked in! Update in January 2021 and the rate is now 0.50%. So these rates vary. Please do your own research.
Looking at the rates a bit more closely. Here are Bank of America’s rates for a traditional savings account as of January 2021 as an example. You’ll earn 0.01% regardless of what amount you put in.
If you know that you won’t need that $2,500 you can consider putting that in a CD account instead. For easy math, let’s say you left this $2,500 in your savings account for a year that paid 0.01% you would have earned:
$2,500 * 0.01% = $0.25
Compare that to the same $2,500 in the CD account for a full year at 1.00%:
$2,500 * 1.00% = $25.00
I have my emergency fund in a No-Penalty CD account. See my Money Map. I talk about my pre tax savings rate here.
Some things I consider when I am looking for a new CD account:
- When do I need the money? I use that to determine the maturity date.
- Do I recognize the name of the bank?
- What is the Interest Rate?
- What is the minimum balance I need to open an account?
- Check the various maturity dates. Depending on the bank’s internal goals, they may give a better rate for certain maturity dates.
- What happens at maturity? does the CD auto renew?
- Check the grace period – how many days do I have after the CD matures to decide what to do? Usually 7-10 days.
- Is there an early withdrawal fee? What is it?
- Are there other fees? For example, if the bank doesn’t have a branch, they may charge a wire fee to wire the money from my bank to theirs. If a bank is incentivized to take my money, sometimes they waive this fee.
PRO TIP (bonus: 2 tips!)
1. Look for a No-Penalty CD as well. You get all the benefits of a higher rate than a traditional savings account with no penalty! I opened a no penalty CD in September 2019 for 1.98% interest, 2.00% APY and now that rate is 1.01% interest and my rate is still locked in!
2. In a rising rate environment (not right now, but just know this for the future), where you think the rates may rise during your CD period, consider taking your total amount available and LADDERING your CDs. Maybe one for 6 months, one for 9 months one for 12 months. That way you’ll have various opportunities during the year to make another decision if you’d like to keep the money or take it out and invest it some other way. This is also good if you don’t want your entire “emergency” locked up for so long.
Our friends at www.bankrate.com have summarized the best CDs rates in (updated) January 2021 :