How to Invest in High-Yield Certificates of Deposit

Saving wisely will yield the most return on your investment.

Saving wisely will yield the most return on your investment.

If you've been squirreling your money away into a savings account, you're on the right track, but you could be doing better. While a savings account is a good beginner option for investing, it won't offer you the best return on your investment. Consider upping your strategy to include high-yield certificates of deposits, or high-yield CDs. High-yield CDs can pay higher interest rates than traditional savings accounts.

Research high-yield certificates of deposit to find the best rate. Rates will vary from bank to bank. One financial institution may offer a high-yield CD at .85 percent interest, while another might offer one at 1.5 percent.

Decide how much money you want to invest. Most high-yield investment options require a large cash deposit. The amount of money you can invest may determine which CDs you need to consider. Opening amounts can range from $500 to $25,000, according to BankRate.

Compare the terms of the high-yield CDs. When you put your money into a CD, you have to leave it in the CD for the full term to earn the high-yield interest rate. This means you won't have access to the funds until the CD matures. The U.S. Securities and Exchange Commission (SEC) reports that CD terms can range from a few months to 20 years.

Find out how the banks compound interest. Banks can compound interest on several different timetables. According to The College of William & Mary's math department, compounding interest can happen on an hourly, daily, weekly, monthly, quarterly, semi-annual or annual basis. The more frequently the bank compounds the interest, the more you will make from the investment.

Consider the financial penalties for early withdrawal. If you pull your money out before the CD matures, the bank can charge you a penalty. If the penalty is more than you earned in interest, the bank can deduct the fee from your principal investment, according to the SEC. This will leave you with less money than you originally invested, and it will have tied up your funds for a lengthy amount of time.

Make sure you understand the fine print. The language can get tricky, especially for first-time investors. For example, the phrase "one-year non-callable CD" does not relate to the maturity date of the CD but rather the "call," or termination, period. This phrase means the bank can't redeem the CD for at least a year. The actual maturity date could be five years away.

Investigate whether the CD has a call feature. In a callable CD, the lending institution, not the investor, decides when to mature the CD. This can happen before the full term of the loan, and it may not benefit the investor, reports the North American Securities Administrators Association. Before you decide to go with a callable CD, make sure you understand all of the call features.

Evaluate whether you want to invest in step-up or step-down CDs. With these CDs, the bank will offer you a fixed interest rate for a set amount of time, typically a year. After that point, the bank can change the interest rate. When this happens, you will still have to honor the length of your CD term or risk paying a penalty. Step-down CDs will lower the interest rate you earn based on the bank's regulations.

Select the high-yield CD of your choice and open an account. If you decide to work with a bank that you already have an account with, you may not need to open a new account. If you go with another financial institution, you will have to fill out the required paperwork, and you will need to provide proof of identity.

Pay the deposit for the CD. Brick-and-mortar banks may accept cash or certified funds to open the CD. Online institutions may require an electronic funds transfer or payment with a debit card.

Keep copies of all records relating to the deposit in a safe place and monitor your account. Your bank may offer online banking, which will allow you to monitor your investment using the Internet. Banks will also send statements for the CD.

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