Beginner's Guide to Investing in CDs

posted on 06-10-2019

If you're a saver living in America, we know you're ready to earn more on your money.

When risky stocks and bonds are out of the question, but you still want more interest than what savings accounts are offering, there is still an investment account that offers hope. And it's more convenient to open than ever before.

FDIC-insured Certificates of Deposit (CDs) are a great bet in a slow or stagnant interest rate environment. You don't have to go to the broker to open one (even though you can) and it doesn't take that long.

They can be opened at any local walk-in bank, or even online.

While it's hard to predict exactly what interest rates will do, you have the option to choose a CD with terms that range from six months to five years.

The Initial Deposit: CDs and Jumbo CDs

Once you decide that you want to put money into a CD, you will need to figure out how much you'd like to put in. Most CDs can be opened with an initial deposit of $1,000, but there are some banks that allow a lower initial deposit amount, or no deposit at all.

If you are fortunate enough to have $100,000 or more to invest, you may choose to open a "Jumbo" CD. Jumbo CDs have a much higher initial deposit, but they generally pay you more interest than a regular CD.


Choosing the Right Term-Length CD for You

If you believe interest rates will rise within the next two years, consider putting your money in a six-month, one-year or two-year (short-term) CD. That way if interest rates rise, you can always wait until your short-term CD matures, cash it out, and then move it to a higher paying short-term CD. Shorter terms pay less but give you more flexibility when it comes to an uncertain or rising interest rate environment.

CDs with a five-year term generally yield the highest percentage, but if interest rates rise within the next five years you will miss out on more attractive CD yields. Still, some people decide to take their chances and get a long-term CD for higher rates of return.

Penalty for Early Withdrawal

Keep in mind, you may take the money out of your CD early, but you will face consequences. The penalty for an early withdrawal can mean forfeiture of the interest you've earned or even some of your principal depending on the term and the bank.

The longer the term of the CD, the more earned interest you may have to forfeit if you break the term agreement early. Penalties can range from as low as seven days simple interest (if you withdraw six days after you open the account), to six months interest.



There are banks that do not penalize (such as Ally Bank), and some banks that allow you to withdraw interest earned without penalty. Shop around to find the best agreement.

There is no maximum penalty that a bank can charge, so make sure and know the penalty rules for early withdrawal from the bank that you choose.

Better yet, do yourself a favor and have an emergency fund (liquid savings account) with plenty of cash that you can draw from before you raid your CD and get hit with a penalty.

The Highest-Yielding CDs in America

Ready to open a CD and start earning interest every month on your hard-earned money? You're in luck! After sorting through 4,800 member-FDIC banks and NCUA-certified credit unions from 50 states, we've brought you a list of the highest-yielding CDs in America. Enjoy!