Compared with investing in the stock market, a certificate of deposit (CD) offers a secure way to generate interest on money that would otherwise be sitting in a savings account. Bank customers who have saved $500-$1,000 can easily open a CD account. The advantage of opening a CD instead of keeping the money in savings is that the CD will probably yield higher interest.

A CD is a type of account that banks and credit unions offer. The bank borrows money from the person opening a CD account. In turn, the bank loans the funds they gain from the CD account to other customers. Then, the bank pays back the principle plus the interest earned to the CD account holder after a given number of days. Therefore, the account holder will not have easy access to his/her account until the term expires. If money is withdrawn early, the bank has the right to assess an early withdrawal penalty.

Most all banks offer their customers the option of opening a CD, but it is important to do comparison shopping at two banks or more before opening a CD account. Searching for CD interest rates and terms online may expedite this process. The bank where the customer has opened a savings or checking account may not be the best option for CDs.

There are three important factors to consider when deciding whether to open a CD at a certain bank: the amount of principle that will be put into the account, the length of term, and the amount of interest the account will draw after the term expires. Generally speaking, the more money that can be put aside the higher the interest rate will be. Longer terms will usually yield a higher interest rate than shorter terms. Banks will advertise interest by APY (annual percentage yield). Look at the APR (annual percentage rate) instead because it offers a more solid forecast of how much money a CD will earn in interest.

After keeping a CD in a certain bank for a given term, determine whether the money is currently needed. If not, re-invest it.