A great many of us have difficulty defining what an emergency is. We have some grasp of what the situation is once we are in it, but when it comes to financial emergencies, every bump in the road can seem disastrous.
Most emergencies happen rather quickly. The sudden loss of a job qualifies as just such an event. Although, in many instances, the so-called “writing on the wall” was visible long before you actually lost your employment. The reactions to those losses however need to be carefully considered and certainly not rushed.
Most financial disasters unfold very slowly. Which is why we build emergency accounts with financial products that will give our money a chance to grow somewhat while it waits for a use we hope we never need.
So how liquid does an emergency account need to be? For most of us the answer is not-so-simple: easy enough to get to but not so easy to get to that you will be tempted by the easy access. We know that retirement accounts do not serve this purpose. We know that credit cards and home equity lines also fail at providing emergency coverage.
Which is why so many people use certificates of deposit instruments to keep their emergency money safe. Used correctly (by laddering the purchase, buying CDs at different maturity dates) these financial tools can be a great place to park money in the short-term. But using them as an emergency account might not be one of them.
On the surface, the access seems easy and the penalties for before maturities withdrawals might seem like something you can live with. But the banks will come out the winner should you need the money before the CD matures.
In the case of CDs with less than a year to mature, the penalty for early withdrawal is three months interest. For a one-year CD, the penalty is six months interest. For a five year CD, the penalty is 20-25% of the interest. That may not seem so bad except that penalty may be on interest you have yet to earn. Which means, the bank may actually be taking some of the principal.
Using CDs can be a great way to make a little bit of interest on your reserve accounts, but using them for emergencies may not work out as planned. And certainly would not be considered a profitable place to park your money for emergencies. Keep your money liquid and without fear of penalties should you need it. You may not make anything worth noting in the process. But at least you will not be penalized if you do need it.
To get the most current CD rates.
Related posts: