A certificate of deposit (or CD) is an investment product which entitles the holder to a certain amount of interest on a deposited amount of money. All CDs have an expiration date which tells the bearer when the full amount of interest on the CD will be available. Basically, it is an IOU issued by a bank which states that if you give them your money, you will get it back after a certain period of time with some interest paid. CD's are available at almost every bank and you can open one by just contacting a local bank branch. However, there are a few things you need to do before you can open a CD
Things You'll Need
- Minimum deposit
- Computer with Internet
Decide how much money you would like to deposit into the CD. Many CD's have minimums which can range from $500 up to thousands of dollars. If you have the funds to meet a minimum deposit, decide how much of that will go into a CD (i.e. if you have $2,000 you can either place the entire sum into one CD or in several, which can have different maturity dates).
Calculate how much money you will get at the end of the period. A CD usually posts an interest rate and an expiration date (it could be from one month to five years). Use this information to determine what your earned interest will be.
Decide on the best interest rate for you is. Obviously, a larger interest rate is better, but if your bank doesn't give an interest rate which keeps up with inflation, then the money will lose value. Inflation usually runs about 2% to 4% per year so make sure your interest rate is above that.
Search for the best CD for you. Don't just put your money in a CD because your bank offers it. The Internet is full of sites which will give you the best interest rates. Look at Bankaholic.com or Bankrate.com for a list of that day's best CD interest rates. Do your homework to make the most money in the least amount of time.
Stagger the maturity dates if you are investing in several CDs. For example, suppose you have $2,000 to invest. You may want to put $500 in a CD that matures in one year, $500 in a CD that matures in two years, $500 in one for three years, and $500 in a four-year CD. Interest rates are usually higher when the maturity date is further out, but since there is an interest penalty of three to six months of interest for early withdrawal, not committing one lump sum in a single CD will make some money easier to withdrawal if needed for an emergency.
Tips & Warnings
- If you like the CD and the rate and want to keep your money in it past the maturity date, inquire about automatic renewal of the CD. Many banks offer this service in order to keep your money with them. Remember, if you chose to renew, you will have to wait until the next maturation date to withdraw the funds.
- CDs are not like money market accounts. Once you deposit your money into the account, you will not be able to get it back until the CD matures unless you are willing to pay a penalty.
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