Beginner's Guide to Investing in CDs

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

Unfortunately, a shaky-looking economy is bad news for stocks, and interest rates may not rise as fast as previously thought.

But there is still an investment account that offers hope for your savings, 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 or retail 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.

[Need to find extra money to start a CD? Check out The Absolute Best Ways to Save in 2011]

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 the 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 Top National CDs and JUMBO CDs

We have put together a list of the top paying CDs and Jumbo CDs. They are categorized by CD size (Regular or Jumbo) and term length. The ranking order is based on the annual percentage yield (APY) of each term and size CD. If you find a bank institution that has a CD or Jumbo CD of your fancy, check out our growing bank directory list so that you can visit their website and find out more about their services.

Now that you know all the factors involved in buying a CD, take a look at our list of the top CDs and Jumbo CDs in the nation.

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