One of the surest, safest and most conservative personal investments you can make is a certificate of deposit (CD). If you play by all of the rules, the principal amount of your CD investment is almost always assured. A certificate of deposit can be issued by a traditional financial institution such as a bank or credit union. However, CDs can also be issued through brokerage firms as well. To make money with a certificate of deposit, of foremost importance is its "term"--how long you wish to invest your money.
Step 1
Go with a longer-term CD over a short-term CD. As noted by MSN Money, CDs require you to commit your investment for a specific duration, be it six months, a year, two years or longer. A higher interest rate will be applied to a three-year CD compared with a six-month CD. In October 2009, MSN Money reported the average six-month CD paid around 3 percent, while a five-year CD paid 5 percent. Because interest rates are always changing, consult Bankrate.com to see what the going rate of CDs is at your local financial institutions.
Step 2
Don't be too influenced by CDs with high yields, warns the U.S. Securities and Exchange Commission. The CD that ultimately makes you money may come with a lower interest rate--and less risk. The SEC points out that CDs with variable interest rates often start to pay less over time. Similarly, brokered CDs rely on the performance of the stock market, which can also affect the earnings on your investment. Of particular importance is to see if your CD is "callable" by the issuer. The SEC notes that long-term, high-interest CDs may be called (terminated before the term is up) by the financial institution, leaving you in the position of finding a new investment--or reinvesting in a CD at a lower interest rate.
Step 3
Don't touch your CD until it matures. You can access your money at any time before the CD's term expires, but this may defeat the purpose of investing. MSN Money stresses you may lose between one and six months of interest if you take your CD out early, and if your investment hasn't yet earned interest, the financial institution may charge you a fee that dips into your principal. This is particularly true of brokered CDs.
Step 4
Ask your financial institution how you can expect the interest on your CD to be paid, advises the SEC. When you get your CD, you will receive a disclosure document specifying the interest rate on your CD, and if it's variable or fixed. Ask the issuer how frequently you'll receive interest payments--for example, monthly or semi-annually. Also find out if you can expect to receive a check or if the interest will be transferred to your account electronically.
Tips and Warnings
- Brokered CDs can be the better investment--but the SEC points out that these are riskier than the CDs offered by banks, which offer predictable but lower earnings. A desirable feature of CDs is that they are federally insured for up to $250,000 per depositor.
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