Could This Be the Best Place to Store Your Emergency Fund?

You know you should have an emergency fund. While most experts suggest setting aside enough to cover three to six months' worth of bills, it's up to you to determine how much you're most comfortable keeping on hand. For example, if you're self-employed or your income varies by month, you may decide you need more.

Once you've decided how large your emergency fund should be, the question becomes the best place to keep the money. You can store it in a checking or savings account, but unless those accounts pay an interest rate that exceeds inflation, your money will lose value each month. You could invest it in a brokerage account, but depending on the type of account you open, you could pay penalties for withdrawing it when needed.

If you haven't looked into a no-penalty certificate of deposit (CD), you may be missing the best place to store your emergency fund. Here's what you need to know about no-penalty CDs.

Image source: Getty Images.

No early-withdrawal penalty

Unlike a standard CD, which generally charges a penalty for withdrawing money before maturity, a no-penalty CD allows you to withdraw money when you need it -- without penalty.

Slightly lower interest rates

In return for flexibility, no-penalty CDs typically pay slightly less interest than traditional CDs. For example, today's rates on traditional CDs are up to 4.10%, while most no-penalty CDs are paying around 3.95%.

Fixed term

One thing no-penalty CDs have in common with traditional CDs is a fixed term that ranges from a few months to a few years. The term you choose factors into the rate you earn.

Minimum deposit requirements

Many institutions require a minimum deposit to open any type of CD, although those minimums aren't unusually high (often $500 or less). However, it's fairly easy to find banks that allow you to open a no-penalty CD with no minimum deposit. Since you're using the money as an emergency fund, you'll probably want to start with enough to get you through a small, unexpected event.

Limited number of withdrawals

Although a no-penalty CD allows you to withdraw without paying a penalty, there may be restrictions on how often you can do so. Before opening a no-penalty CD, check how frequently you can make withdrawals.

Partial withdrawals may not be permissible

While you won't be hit with a penalty when you withdraw your money, most no-penalty CDs require you to withdraw your entire balance at once, rather than making partial withdrawals, as needed.

A no-penalty CD is an excellent idea if you're looking for a safe place to save money you may need access to before it matures. You may earn a slightly lower interest rate, but in return, you'll get lots of flexibility.

The Motley Fool has a disclosure policy.