How Do I Choose a Certificate of Deposit Term?

Research your options before handing over money for a CD.
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Certificates of deposit, or CDs, offer you an opportunity to save or invest your money at a higher interest rate than regular savings accounts. Your investment in a CD is insured up to $250,000 by the Federal Deposit Insurance Corp. You may purchase a CD with a term of six months for a short-term investment, or you can purchase a CD that has a term of five years or more. What you choose depends on your goals and financial needs. You also have the option of reinvesting after your term has expired.

Step 1

Determine your goals. If you want the option to reinvest after the end of the term, you may want to choose a shorter term. If you're set on keeping your money in the CD to build as much as possible, choosing a longer term is ideal.

Step 2

Research the available options. The traditional CD allows you to deposit an amount of money for a specific amount of time and receive an interest rate that is predetermined. Another option is the bump-up CD, in which you can "bump up" your rate -- one time only -- to the current interest rate for the remainder of your term if the interest rate rises. Liquid CDs allow you to withdraw money without incurring a penalty, but the rates are not as high as those of traditional CDs. Zero-coupon CDs allow you to purchase the CD at a deep discount, but the interest is not paid until the end of the term, and you're still responsible for the taxes each year. Callable CDs allow the issuing bank to call back the CD if the interest rates have dropped after your call-protection period is expired.

Step 3

Contact the financial institution once you've decided what type of CD you want. Read the fine print and sign any necessary paperwork. As long as you agree with the terms, you're on your way to owning a certificate of deposit.

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