Common Mistake: Investing Your Emergency Fund in a CD

When you invest in a CD, you agree to lock in your money for a specified term. There is a steep penalty if you need to withdraw your money before the CD matures. This is called a premature withdrawal penalty. Therefore, you should not keep your emergency fund in a CD.

Brokerage firms offer CDs that appear to have no early withdrawal penalties. If you need to cash in the CD before the maturity date, your CD is sold to another investor. Although you don’t pay a penalty, you incur selling costs (broker fees) and your CD may be worth less than you invested.

Tip: Shop Around for the Best Rate

It is important to shop around for the best interest rate. Many financial institutions advertise their rates. You’ll often find higher interest rates to attract new customers. You can also shop around on the Internet for higher CD rates at Web sites such as www.bankrate.com and www.emoneycentral.com.

Just because a financial institution gave you a great rate on a CD when you made your first investment doesn’t mean it will treat you as well when it comes up for renewal. Each time a CD matures, you should shop around again for the best rate. It is easy to move your money from one financial institution to another.

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