CDs: 3 Key Questions to Ask Before Investing

Before you open a certificate of deposit, run through these essential questions to make sure it's the right move.

Putting money into a certificate of deposit (CD) can be a smart move. Often, a CD will reward you with a higher interest rate on your money than what you'll get in a regular savings account. And unlike with brokerage accounts, where you invest your money but run the risk of losing some, the money you put into a CD is protected (assuming your deposit doesn't exceed $250,000).

But a CD isn't something you should rush into opening. Before going that route, be sure to answer these key questions.

1. Do I need this money for emergencies?

When you put money into a CD, you commit to leaving it where it is for a preset period of time. That period may be six months, 12 months, two years, or longer. If you cash out a CD early, you'll face a penalty that's predetermined by your bank. Usually, that penalty will amount to a few months' worth of interest.

Because a CD is money you should plan not to touch until it comes due, you'll need to make sure you're all set with emergency savings before opening one. Take a look at what you spend each month and make sure you have enough cash in a regular savings account to cover three to six months' worth of bills. If you only have, say, $3,000 in a regular savings account but spend $2,500 a month on living expenses, your extra money shouldn't go into a CD.

2. Have I rate-shopped?

You may be inclined to open a CD at the same bank you use for your savings or checking account. But before you do, make sure the rate your bank offers is competitive. In fact, it's a good idea to check out CD rates at different banks to make sure you're getting the best deal.

Keep in mind that some banks might offer higher interest rates on CDs but also impose a minimum deposit you can't make. If you're looking to put $1,000 into a CD but the best rates are offered by banks that want a $5,000 minimum deposit, that won't work for you.

3. Have I compared CD rates to savings account rates?

There are times when you'll earn a lot more interest by putting your money into a CD versus a savings account. But these days, CD rates and savings account rates are pretty comparable. So there's little sense in tying up your money for any period of time when there's not much of a financial reward to be reaped.

Opening a CD could be a smart move if you're all set with emergency savings, you've found a rate you're happy with, and you stand to earn a lot more interest than what a savings account will pay you. But make sure to run through these important points before committing to a CD of any length -- even a shorter one.