When you shop around for a CD, ask the following questions. As with the other investments I discuss in this chapter, talk to at least three different institutions before you take the plunge.
- What’s the minimum deposit to open the account? Usually this amount is $500.
- What’s the interest rate? What is the compounded annual yield? Interest is the percent that the bank pays you for your allowing them to keep your money. The rate of interest is also called yield. Compounded annual yield comes into play if a bank is paying interest monthly, for example. Once the first month’s interest is credited to your account, that interest starts earning interest, too, meaning that the compounded annual yield is slightly higher than the interest rate.
- How often is the interest compounded? Remember, the more frequently it’s compounded, the better it is for you. Continuous compounding is best.
- Is the interest rate fixed or variable? Make sure that the institution offers you a way to get current interest rates quickly and easily — by phone, for example.
- Can you add to your fund at a higher interest rate if the rate goes up while your money is invested? If the rate goes up substantially, and you can add to your fund, then you can significantly increase your yield.
- What’s the penalty for early withdrawal? These penalties can wipe out any interest you earn.
- What happens to the deposit when the CD matures? Does the institution roll a matured CD into a new one of a similar term? Does it mail a check? Credit your checking account?
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