A Certificate of Deposit, or CD, is a great way of saving money. Most banks, credit unions, and other financial institutions offer CDs to their members as an easy way of saving money while earning interest. So how do CDs work, and how do you get one? Read on to find out more.

Getting a CD can be as easy as asking your bank, and of course, having enough money to “start” one. The basic concept is this... You buy a Certificate of Deposit for a fixed price that lasts a given amount of time. After that time is up, you receive the deposit plus interest accrued during the time it was in effect.
Most banks offer CDs for as little as $250-500 with a duration of 3 to 6 months. Of course, longer terms can be obtained, such as 1, 5, and even 10 year CDs. The term of a CD is more of a personal preference but the interest rate will also increase as the time span becomes greater.

During the time the CD is in effect, your money earns interest at whatever rate was agreed upon when the CD was purchased. This interest is usually compounded monthly, meaning the second month will earn interest on the initial deposit (principal) plus interest earned from the first month. The third month will earn interest on the principal plus the interest earned from the first two months, and so on. The power of compound interest becomes more prevalent as time goes on.
Once the term is complete (the CD has “matured”), you are free to use the money as you desire, or roll it over into a new CD.

Let's say you have $500 to invest and will not need the money for at least 6 months. A 6 month CD may be the perfect option as you will earn a greater interest rate than just leaving the money in a savings account. Banks are more than willing to pay the higher interest rate because the CD guarantees they will have that money for the entire 6 months. So all you need to do is tell your bank you want a $500 CD for 6 months and they will take care of the rest.
It is important to note any special terms or conditions that may come along with the CD. Some banks require a minimum monthly contribution to the CD, which means you must deposit additional funds each month. This also means that at the end of the CD, you will have substantially more than you started with, and each month you will earn interest on more money.
Most banks offer the option of depositing the money straight into your account once the CD has matured.

There are few downsides to investing in CDs, but, like any investment, they are not for everybody. Most CDs have early withdrawal penalties and may charge extra fees if you need the money before the term is up. So it is important that you use money that will not be needed for the life of the CD.
On the flip side, the investment is stable and secure. You know up front how much you will make and when the money will be available.

With the ever increasing complex methods of investing, CDs are a great starting point. They offer the average individual a cheap and easy way to get started and provide a stable balance with other investments.