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Can CDs be a good place for your emergency fund?

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If your emergency fund is sitting in a savings account that pays virtually nothing you might consider investing those dollars in a certificate of deposit.

CDs are just as safe and you’ll earn a little more interest.

The only caveat is that you’ll have to make sure you don’t get hit with stiff early withdrawal penalties should you need access to those funds before the maturity date.

And let’s face it, you never know when an emergency will pop up and you’ll be relieved you have six months or so worth of expenses socked away.

(How much do you need to have available? Take a look at our plan for setting your emergency fund amount.)

So what CD should you choose?

To make a CD worthwhile, you’ll need one that beats the top nationally available savings rate, which has been stuck at 1.01% APY for more than a year.

To achieve that return you’ll probably need to commit your money to at least a 2-year CD.

Search Bankrate’s regularly updated database of the best CD rates to see how much you can earn.

But rates aren’t the only concern you should have when investing your emergency fund.

You also need a CD with the lowest possible early withdrawal penalties, just in case you need your money before the two years are up.

Take Ally Bank, for example, which imposes some of the lowest fees.

The online bank based in Charlotte, N.C., is paying 1.10% APY on its 24-month “Raise Your Rate” CD.

That’s not the best nationally available deal out there even if Ally does allow you to benefit from higher rates should it boost the return on 2-year CDs.

But the penalty for taking your money out before maturity is a very modest 60 days – or about two months – worth of interest.

Compare that to the more onerous fee levied at VirtualBank.

You might be tempted to invest your money there because this online division of a big Spanish Bank offers 1.26% APY, which is the top nationally available return on 24-month CDs right now.

But if you need your cash back before those two years are up it will cost you 6 months worth of interest.

So even though the interest rate is a little higher, the early withdrawal penalty is three times stiffer. I don’t’ know about you, but I’d buy my CD from Ally.

Then there’s the worst kind of early withdrawal penalty, which you absolutely have to avoid if there’s any chance you’ll need your money early.

Salem Five Direct is paying 1.25% APY on 24-month CDs, the second best nationally available return.

But the online division of Salem Five Bank, a regional bank with 23 branches north of Boston, charges 4% of the amount you withdraw if you break the terms of your CD.

That means Salem Five will actually ding your principal if you need your money back before the two years is up.

Let’s say you invest $1,000, which grows to $1,012 during the first year of the term. But then have to close the CD early and take out the full amount. The early withdrawal penalty of $40 means you’ll only get a check for $972.

Ouch.

Sometimes, this information isn’t in the fine print — you have to talk to an actual live person to find out these details.

It’s well worth the conversation before committing your emergency funds to a CD.

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