When to Use Your Emergency Fund: 3 Questions to Consider
Is the expense unexpected? Urgent? Necessary?
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No-Penalty CDs: A Smart Emergency Fund Option
Here’s how a no-penalty CD can be a part of your overall emergency fund strategy.
FDIC-Insured – Backed by the full faith and credit of the U.S. Government. Goldman Sachs Bank USA, Salt Lake City Branch.
FDIC-Insured – Backed by the full faith and credit of the U.S. Government. Goldman Sachs Bank USA, Salt Lake City Branch.
FDIC-Insured – Backed by the full faith and credit of the U.S. Government. Goldman Sachs Bank USA, Salt Lake City Branch.
Having an emergency fund is a key component of financial wellness. Whether it’s a surprise medical bill or a sudden job loss, a healthy cash reserve can help provide a critical financial safety net.
While a traditional savings account is what often comes to mind when you’re thinking about where to put your emergency fund, did you know that a no-penalty CD could also be a smart option?
Here are three reasons why:
- A no-penalty CD is a generally safe and accessible account to hold your cash.
- It typically offers a higher APY than a traditional savings account.
- It provides greater withdrawal flexibility compared to a traditional CD.
Let’s take a closer look at how a no-penalty CD can be a part of your overall emergency fund strategy.
Benefits of using a no-penalty CD for your emergency fund
When you open a traditional CD, you agree to leave your money in the account for a set term. If you break your CD before it matures, you typically have to pay a penalty. This reduced liquidity is one reason why traditional CDs aren’t a common first choice for maintaining emergency funds.
Because isn’t the whole point of an emergency fund is so that you’re able to easily access your cash whenever you need it?
If you’re looking for a low-risk, flexible account to park your emergency fund and let your money earn interest, a no-penalty CD may check all the right boxes for you.
Consider these key features:
Withdrawal flexibility
A no-penalty CD, unlike a traditional CD, allows you to withdraw your full balance before the end of your CD term—without having to pay an early withdrawal fee. For instance, many accounts let you withdraw your money after a certain number of days after funding (usually six or seven days depending on your bank). The withdrawal flexibility can help give you the liquidity you’ll need for emergencies.
Dedicated account
Using a no-penalty CD as a separate account to hold some of your cash reserve can be a smart move. It could help you avoid mixing your day-to-day money with the funds you’re setting aside for emergencies, minimizing the chances of you accidentally spending your savings that’s meant for unexpected expenses.
Fixed APY
Putting your emergency fund into a no-penalty CD can help your money earn more interest over time compared to a traditional savings account. Unlike a basic savings account that offers a variable rate, a no-penalty CD allows you to lock in a fixed rate over the term of your CD, giving you a guaranteed rate of income—even during periods of economic uncertainty when interest rates may fluctuate. Bonus point? No-penalty CDs often carry higher APYs than those offered by traditional savings accounts.
Low-risk
A no-penalty CD is generally considered a safe, low-risk account because you get the return of your principal along with any interest accrued at the end of your CD term. Also, if you open an account at a FDIC member bank, your deposit is insured up to the maximum allowable by law (currently $250,000 per depositor, per FDIC-insured bank, per ownership category).
No-penalty CDs: Ready for whatever life may throw at you
Emergencies can happen to anyone. Whenever life takes an unexpected turn, having a solid emergency fund can help with those unexpected expenses that may crop up.
If you already have a healthy cash cushion parked in a traditional savings account, consider adding a no-penalty CD to your emergency fund strategy. Once you open an account, you could shift a portion of your emergency fund into the no-penalty CD, where it can earn a higher APY. And with the withdrawal flexibility, you’ll have peace of mind knowing that your emergency cash remains accessible when you need it most.
While no one sets out to open a CD with an eye toward early withdrawal, life happens, and a no-penalty CD can help you stay ready for those unexpected moments.
Things to keep in mind if you’re using a no-penalty CD for your emergency fund
While a no-penalty CD can be a great vehicle to hold your emergency fund, here are a few points to remember.
There are no partial withdrawals
Being able to take out your funds before the maturity date without penalty is a big draw for no-penalty CDs. However, you typically have to withdraw your entire balance at once. For example, if you have $5,000 in a no-penalty CD and need to tap that money before the end of your CD term, you must take out the full balance. Many banks do not allow for partial withdrawals with their no-penalty CDs.
You cannot keep adding money to it
When you open a no-penalty CD, you cannot continuously add funds to the account after the initial funding period. If you need a deposit account that you can continuously withdraw from and add funds to, you may want to consider using a high-yield savings account instead.
Is a no-penalty CD right for you?
Any savings account should ultimately work for whatever your savings goals may be. Given its low risk, withdrawal flexibility, and competitive rate (compared to a traditional savings account), a no-penalty CD can be a great addition to your overall emergency savings strategy.
Depending on your needs, you may find that you’ll need to use a combination of different savings vehicles for your emergency savings. For instance, some may want to use both a no-penalty CD and a regular savings account.
This could provide the best of both worlds: Your savings account would allow you to continue building up your cash reserve, while your no-penalty CD could help put some of your emergency savings to work earning a higher APY.
Here’s a quick example: Let’s say you have $20,000 in a basic savings account reserved for emergencies. You could move $15,000 (or any amount you’re comfortable with) into a no-penalty CD to take advantage of the higher APY.
The $5,000 that’s left in your savings account? That could be used for emergencies like car repairs, unexpected bills, or a last-minute flight to visit a sick relative. For big emergencies, such as a sudden loss of income, that’s when you could crack open your no-penalty CD to access the rest of your cash cushion.
Compare: no-penalty CD vs. traditional CD vs. traditional savings account
No-Penalty CD
Traditional CD
Traditional savings account
|
No-Penalty CD |
Traditional CD |
Traditional savings account |
|
|---|---|---|---|
|
Interest rates |
Typically a fixed rate |
Typically a fixed rate |
Variable rate |
|
Withdrawals |
Typically a fixed rate. No early withdrawal penalty. You can typically withdraw money after a set number of days after funding, but rules vary at different banks. And you usually have to take out your full balance—generally, there are no partial withdrawals. |
Withdrawals before the end of your CD term typically result in an early withdrawal penalty. |
You can take out as little or as much as you want from a savings account. Withdrawals may be limited to 6 per month, depending on your bank and the type of withdrawal you make. |
|
Minimum deposits |
Yes, the amount varies from bank to bank. |
Yes, the amount varies from bank to bank. |
Yes, typically a low or no minimum deposit is required to open an account. |
|
FDIC insurance |
Yes, if you open an account at a FDIC-member bank. |
Yes, if you open an account at a FDIC-member bank. |
Yes, if you open an account at a FDIC-member bank. |
Opening a
no-penalty CD
Many banks offer no-penalty CDs. It’s a good idea to do some research and comparison shopping before opening an account. Account features and terms vary from bank to bank, so make sure you get the details.
Some questions to ask before opening an account:
- What is the APY and CD term?
- Is the account FDIC-insured?
- Is there a minimum opening deposit or account fees?
- What are the withdrawal rules? Are there any restrictions to an early withdrawal?
Ready to add a Marcus No-Penalty CD to your savings strategy?
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format without the express written consent of Goldman Sachs. This foregoing restriction includes, without limitation, using, extracting, downloading or retrieving this information, in whole or in part, to train or finetune a machine learning or artificial intelligence system.
