1. Decide How Long the CD Should Last
One of the first decisions you have to make before you open a CD, or certificate of deposit, is how long the money will be tied up. You can choose CDs lasting anywhere from six months to 10 years. The longer the CD lasts, the higher the interest rate will be. For example, you may find a six-month CD yields 3 percent, while the same plan offers 4.5 percent for a five-year CD. Keep in mind, the funds you put in the CD are not available for use until the term on the CD is fulfilled, unless you choose a plan with an option to get money early for a penalty.
2. Compare Interest Rates
The more money you invest in the CD, the higher the interest rate will be. For example, you may get 3.5-percent interest on $1,000, but investing $25,000 will yield a 5.5-percent interest rate at the same bank. The bank provides a higher rate of interest because you are providing more money for the bank to loan to others for profit. Every bank or other financial institution sets its own interest rates according to its financial goals and the Federal Reserve, so shop around.
3. Find Out When Interest Compounds
While interest is important, you need to know how the interest on the account compounds. You can get a higher rate of return on an interest rate if the interest builds monthly instead of yearly. For example, $1,000 at 3 percent will earn $159.27 over five years when compounded yearly. Compounded monthly, the same $1,000 at 3 percent yields $161.62 in five years. Some CDs may accrue interest monthly but they only compound the interest twice a year, which is better than once a year.
4. Fill Out Forms and Deposit Money
Once you find the bank or other financial institution where you want to establish a CD, you need to fill out the application and other forms to open the investment account. Deposit funds into the CD by check or through an electronic method. Some institutions offering CDs allow you to fill out the paperwork online and transfer funds into the CD from your computer.
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