Looking to Invest in a CD? Here's How to Pick the Right One

If you're hoping to invest in a CD, now is a great time to find one. There are quite a few CDs offering rates above 5.00%. That's an extremely competitive yield, considering you're taking on very little risk with this investment.

The one problem, though, is that there are so many good CDs out there, it can be hard to pick the best one for your situation. If you're struggling to choose, here's what to do.

1. Decide how much you want to invest

Some CDs have no minimum balance requirements at all. You can invest with whatever amount of money you have available. Others require you to deposit at least $500 to $2,500 -- or more. You'll need to find a CD that doesn't require you to invest more than you can afford to tie up.

When you decide how much to invest, think carefully about two things:

• How much money can you afford to leave invested for the CD term? There are penalties if you take money out early, so be absolutely certain you won't need the cash.
• What is the opportunity cost? Any money you put in CDs is not as liquid as cash in a savings account. And investing in a CD will cap your annual returns at about half (or less) the returns you could make if you invested in an S&P 500 fund. So, consider what you're giving up by tying up your money in a CD.

2. Decide how long your CD term should be

Most CD terms fall between three months and five years. That's a big range of time. Whatever CD term you choose, you'll be guaranteed to earn the promised rate during that time period. And you'll have to leave your money invested for that duration to avoid penalties.

When you decide on a CD term, consider:

• Your comfort in committing your funds for that long: If there's a chance you'll need the money sooner, you should choose a shorter term.
• Rates offered by CDs with different term lengths: Right now, short-term CDs are paying more than long-term CDs. This is the opposite of what usually happens, as you normally get paid more for agreeing to commit your money for longer. You may decide you want to take advantage of the chance to earn some impressive yields without a long commitment.
• The likelihood that interest rates will go up or down: If you think rates are going to go down soon, it may pay to buy a CD with a longer term, like a 3- or 5-year CD, so you can ensure you're able to keep earning the high rates available today.

3. Comparison shop to find the best rates

After you've decided how long your term should be and how much you can invest, it's time to shop around and see the different CD offers that are out there. The Ascent's list of the best CD rates is a good place to start. You'll want to focus on:

• The rate paid: The higher the APY, the better.
• The term: Pick a CD based on the term you chose.
• The minimum investment required. Pick a CD that doesn't require you to invest more than you decided was safe.

After doing these three steps, you should be able to identify the best CD, buy it online, and start watching your money grow.