How to Open a Certificate of Deposit
A CD can be a good option for someone who wants a low-risk investment for their portfolio. It’s important when opening a certificate of deposit to compare rates, terms, and features of the account to make sure you’re choosing a good long-term option.
A certificate of deposit, also called a CD, is a type of investment account that allows people to deposit a sum of money and then earn interest on that money over time. When the account holder ultimately withdraws the money, they should have a larger amount than what they put in (unless they made withdrawals before full maturity).
CDs are subject to certain terms. This means that there is a date of maturity, which may be, for example, 12 months in the future (though it’s often longer). If someone tries to take their money out of the CD before that time, they have to pay a penalty. In these cases, you might end up having a negative return on your investment.
There are some CD products available that provide for a certain number of withdrawals or have some elements of liquidity, but most don’t. The concept of paying a penalty is something to be aware of if you are considering a CD.
Steps for Opening a Certificate of Deposit
For the most part, it’s not very difficult to open a CD. It’s much like opening another type of deposit account such as a savings account.
Here are some steps to keep in mind when opening a certificate of deposit:
- Choose a trustworthy bank or financial institution: A lot of people will end up opening a CD at a bank they already do business with because they’re comfortable with the organization. There also tend to be benefits to having multiple accounts at a bank, such as a higher APY on CD deposits. However, consider online-only banks as well, because they often offer the highest interest rate earnings on CDs and other accounts.
- Compare the types of CDs available: There are a lot of specific types of CDs available. CDs can vary based not only on interest rates, but also the minimum opening deposit requirement, withdrawal penalties, and terms.
- Choose a term you can commit to: If you think there is even a chance that you will need access to the money you’re depositing into a CD account, you may want to reconsider this option or choose a CD with a shorter term. There are a lot of short-term CDs available, and while the interest rates are usually lower, they offer more flexibility, so you aren’t stuck with penalties.
- Choose how you’ll take your interest: When you earn interest on your CD, you may have different options as to how you receive that payout. For example, while you can’t withdraw the principal, you may be able to get the interest monthly or annually. What a lot of people do is reinvest the interest so that it’s compounding.
- Speak with a financial institution about opening an account: Once you’ve decided on a bank and a specific CD, you can figure out how you’ll need to go about actually opening the account. Most banks let you open a CD online as long as you’re able to send over personal information, such as a form of identification. However, some traditional banks may require you visit a branch. If you’re depositing over a certain amount, some institutions may also make you visit a branch.
- Fund your CD: Funding your CD can be done in different ways. The easiest is to see if you can transfer money from an internal or external account directly into the CD account. Otherwise, you may have to facilitate something like a wire transfer or mail a check to the bank you opened the account with.
What Are the Pros and Cons of Investing in a Certificate of Deposit?
There are pros and cons to any financial account or investment product you’re considering, and a CD is no exception.
- There is no risk of losing your principal
- The rate of return will likely be higher than it would with a savings account
- Many people use it as a way to diversify their portfolio and integrate a low-risk investment
- You don’t have to do anything to maintain a CD over time like you do with a stock market investment portfolio
- Even the most competitive interest rates are lower than they would be with many other types of higher-risk investments
- You will have to pay a penalty if you need the money in the CD, so there’s no liquidity during the outlined terms
A CD can be a good option for someone who is risk-averse or wants to mix a low-risk investment into their portfolio. It’s important when opening a CD to compare rates, terms, and features of the account to make sure you’re choosing a good long-term option for your financial needs.