How to Invest in a CD

A CD, or a certificate of deposit, is a very easy and low-risk way of investing your money. Basically, you enter into a contract with your bank, and in exchange for a higher interest rate, you will leave your money with them (not to be removed except by penalty) for a fixed term. The rates and terms vary from product to product.

Instructions

1. Set a term. A term is how long you want to leave your money with the bank without accessing it. If investing a large amount, it's wise to have a little emergency fund in a short-term CD (90 days is often the shortest term a bank will offer) and the rest in a longer, higher-interest term (some banks offer up to several years). Consider that some banks offer a progressive take on the CD, like Bank of America's Risk-Free CD, where you pay no early withdrawal penalty fee when you reinvest the money in another BA account.

2. Compare rates. Do your homework both online and on foot; check with your local bank and nearby small banks (which sometimes can offer better rates). When you look at the rates, look for high APR and APY (Annual Percentage Rate and Annual Percentage Yield). While both numbers are important, on a CD an APY is more indicative of what will be paid into your account (APY takes into consideration both the APR and the compounded interest, the idea that any interest gained this month will earn additional interest next month).

3. Look into online savings accounts. A fairly recent development in savings, they are internet only access, meaning there are no banks or tellers. You simply transfer the funds from another account directly to your online savings account. Online only accounts often have the ability to offer the best rates in the business and some banks like CapitalOne even offer additional incentives, like Reward points or Airline Miles on accounts.

4. Talk. Often, if you're friendly or have been a frequent customer, banks will give you a heads-up on when they will be offering special incentive rates on CDs. If you get this kind of insider tip, it's wise to take advantage of it.

5. Choose Your Investment. Because CD's are fixed term, and you will pay a penalty if you have to withdraw, invest a modest amount, something you are more than likely not to require access to for the duration of the fixed term.

6. Consider opening a liquid savings account at the same time, so you will have some emergency funds set aside should you need them before the maturation of the CD.

Tips & Warnings

• Always consider that a CD might not be the best option for you--if you're investing for retirement purposes, there are usually tax free or tax deductible options that you can take advantage of.