Have You Put Your Emergency Fund Into CDs Yet?

One of the best ways to protect your family is to have a large emergency fund for those unexpected expenses. A good emergency fund contains enough money to support your family for at least six months after an unexpected job loss or life change, and it also works as a cash source for those new refrigerators, broken legs, and other surprise expenses that pop up.

If you don’t yet have an emergency fund, start saving now. According to a 2013 report from the Corporation for Enterprise Development, early 50 percent of Americans have little to no savings, meaning that their life emergencies become true emergencies. If you don’t have cash to fix your car’s transmission, for example, you’re forced to choose between putting it on a credit card or not driving to work — and just imagine what might happen if you lost your job.

Once you have your emergency fund set up, it’s time to start maximizing its opportunity. Yes, it is perfectly possible to keep your emergency fund money safe and secure in a bank account. However, if you have a large amount of cash set aside, it’s often better to invest it in a fixed-rate CD: a certificate of deposit with a guaranteed return.

This is how fixed-rate CDs work: you select a CD based on a term length. CD term lengths run for as little as three months to as long as 10 years. Then, you place your money into the CD. During the CD term length, you are unable to retrieve your money; the holding bank takes care of it for you. If there were a true emergency, you could pull your money out of the CD, but it would come with significant fees. After the CD term length is complete, you receive your money back along with the guaranteed-rate interest stated at the beginning of the CD term.

Like many other types of investments, CD interest rates get higher the longer you are able to leave your money in the CD. This is why many people choose to build what is called a CD ladder: staggering CD term dates so that you are able to take advantage of maximum CD interest rates while still having cash available to you for emergencies.

A CD ladder works like this. First, you divide your emergency fund up into equal chunks, setting an additional chunk aside to keep in your bank account for immediate emergencies. Then, you invest the chunks into CDs as follows:

  • One 3-month CD
  • One 6-month CD
  • One 9-month CD
  • One 12-month CD

Every three months, a new CD comes due, plus the interest you’ve earned. If you need the CD money to pay off a new refrigerator or support the family during a job loss, keep the money. Otherwise, immediately reinvest it, along with the interest, into a new, 12-month CD. After a few months, you have a series of rotating 12-month CDs that are getting you significant interest returns and also giving you available cash every three months, should you need it.

Another reason that CDs are an excellent investment for families is that CD rates are rising again, after dropping during the recent economic crisis. Current CD rates are extremely favorable to families wishing to invest. I recommend you learn about Discover Banks current CD rates and note Discover’s tip that a longer-term IRA CD earns higher interest than shorter CDs. There are great CD rates available for any type of investment, so do your research and find out which CDs are right for you.

Trusting that you can put your emergency fund into CDs is sometimes nerve-wracking. What if you build a CD ladder and wreck your car the very next day? Keep in mind that if you truly need the cash right away, you can always pull it out of the CDs and pay the appropriate penalty. Otherwise, you’ll have new cash coming to you every three months, as well as the small amount of “immediate emergency” cash that you’re keeping in your savings account.

If you don’t have enough of an emergency fund yet to start investing in CDs, don’t worry. You can start building your emergency fund today, by paying attention to where your money is going and making adjustments to your budget. If you save $100 every month, by the end of the year you’ll have $1200 set aside — enough to invest in a small CD. After two years, you’ll have enough for a full CD ladder.

When you’re taking care of a family, you need to make sure that every dollar you bring into the house is doing as much work as possible. Putting your emergency fund into CDs allows your money to work for you, while still keeping your family safe when emergencies happen.

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