How to Open a Certificate of Deposit

One of the easiest ways to earn a little interest income on your savings is by purchasing a certificate of deposit (CD). A CD is a special type of savings certificate in which an individual promises to keep a certain amount of money in the bank for a designated period of time in exchange for earning a higher interest rate.

Unlike a traditional savings account which earns between 0.04% - 0.05% in interest annually, most CDs start at 0.10% and can go as high as 2.6% depending on the amount and the term. For those of us looking for a safe way to earn money on our emergency savings funds, a CD is a great alternative to a traditional savings account.

Here is how you too can start earning interest with a certificate of deposit:

Determine how much money you have available for a CD. Before shopping around for a CD, decide how much of your savings you are willing to tie up in this type of savings program and for how long of a term. Credit unions will issue a CD for as little as $500; most major banks however require an initial deposit of $1,000 to $5,000. Terms can be as short as 90 days and as long as 5 years (or 10 years for larger deposits).

Do some comparison shopping at different banks and credit unions. The next step is a bit of comparison shopping for the best rates. For example, if you are interested in purchasing a one-year CD for $1,000, check the CD rates at different local banks, credit unions, Savings & Loans, or even on-line to see who is offering the best interest rates.

The application process. Opening up a certificate of deposit is amazingly easy. I've opened several 5-year CDs over the years and found it to be as easy as opening up a new savings account. The process starts at the bank where you've found the best terms.

-- You will be asked to fill out an application which asks for your personal contact information, the amount of the deposit, and the desired term. You may also be asked to name a beneficiary in case of death.
-- A bank officer will verify social security number and identification once the application was completed.
-- The officer should then be presented with cash, a cashiers check or personal check in the amount of the CD.
-- In return the depositor is presented with a paper receipt which spelled out the terms of the CD, the rate of interest, the penalty for early withdrawal, and the maturity date.

Most banks handle this type of transaction quite similarly; for online investing, the funds will have to be transferred electronically.

For us small time investors, a certificate of deposit really is a great investment tool. The money is safe, secure, and earning interest that will increase our savings faster than an traditional savings account. A word of caution however: CDs are intended to be a long term savings strategy and are subject to penalty (usually equivalent to 3-6 months of interest) in case the funds are withdrawn before they reach maturity.

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