Experiencing a major life change like a layoff can be difficult to navigate, especially if you weren’t expecting it and don’t have a financial safety net to fall back on.
According to a survey by MyPerfectResume, more than 80% of workers are worried about losing their jobs. And that’s a valid concern, as layoffs have been on the rise.
More recently, the U.S. labor market lost 23,000 jobs in July, according to the Labor Department’s report, compared with the 80,000 gain that economists surveyed by Bloomberg had expected.
If you do lose your job, maintaining cash flow and having emergency funds to cover essential expenses is key. And a certificate of deposit (CD) can help you do just that.
How do CDs work?
A CD is a type of deposit account that allows you to lock in a fixed interest rate on your balance in exchange for keeping your money on deposit for a set period of time.
Here’s how it works: First, you deposit a lump sum into your account at the agreed-upon rate. You keep your money in the account for the entire term (which can range from a few months to several years). Then, once your CD matures, you can withdraw your principal balance and any earned interest.
One of the biggest benefits of CDs is that they often pay much higher interest rates than traditional savings accounts or checking accounts. This allows your savings to grow at a faster rate.
The drawback: If you need to access your money before the maturity date, you’ll be subject to an early withdrawal penalty. This can wipe out the interest you’ve earned, and in some cases, even some of the principal.
Additionally, most CDs are federally insured up to $250,000 per depositor, per institution, per ownership category. You can also use a service like CDARS to insure deposits beyond the $250,000 maximum. This ensures your cash isn’t at risk of theft, damage, or loss — and your money is protected in the rare instance your bank fails.
Read more: Is paying a CD early withdrawal penalty ever worth it?
How to financially prepare for layoffs with a CD
In the event of a layoff, it’s important to have an emergency fund that can cover your essential expenses for several months while you search for a new job. Of course, building an emergency fund takes time, so you’ll want to start saving now — just in case.
Additionally, keeping a portion of your emergency savings in a CD comes with a few advantages. Here’s how to strategically use CDs to financially prepare for a layoff.
1. Lock in higher interest
If your emergency savings fund isn’t exactly well-funded, taking advantage of today’s CD rates can help you grow the balance more quickly. In fact, the best CD rates today hover around 4% APY (versus the national average savings account rate of just 0.41%).
2. Take advantage of interest income
You have a few options for handling the interest that your CD earns. It’s common to have the interest reinvested in the CD so that it compounds. However, if you’re experiencing a cash flow crunch following a layoff, you might opt to have that interest paid out to you at regular intervals.
Many banks and credit unions allow you to have CD interest deposited into a linked savings or checking account. Less commonly, you may be able to have the interest mailed to you via check.
3. Create a CD ladder
It’s important to have some of your savings in a fully liquid savings account so you can access the money at any time without penalty. However, CDs require you to keep your money on deposit for a certain amount of time. So, how do you take advantage of today’s elevated CD rates without giving up access to your money?
A CD ladder is a strategy for balancing higher yields with liquidity by divvying your savings across multiple CDs that mature at different intervals. So, instead of locking all your money into one long-term CD and sacrificing access to all your cash, a CD ladder staggers the maturity dates so you regularly regain access to a portion of your funds.
For example, you might spread your savings across multiple CDs with terms of three months, six months, nine months, and one year. When the three-month CD matures, you can choose to withdraw the cash or reinvest it into a new one-year CD at the top of the ladder to maintain the cycle (and potentially lock in higher rates).
4. Consider a no-penalty CD
If you’re worried about incurring early withdrawal penalties, another option is to open a no-penalty CD. These CDs let you withdraw your money before the maturity date without paying an early withdrawal penalty. However, the interest rates on no-penalty CDs tend to be lower than traditional CDs, so it’s important to consider this trade-off before choosing an account.
Read more: How to open a CD account in 5 simple steps