Purchasing an online CD to supplement an online savings account will ensure that clients earn a higher interest rate for the money that they save. When a person has a savings account, he or she can access the money anytime. With a CD, however, customers who withdraw their money before the maturity date will pay a penalty. Therefore, account owners have to determine the length of the term for their online CD by considering several factors.

Customers should begin by considering the interest rate. A shorter term CD earns a lower interest rate than a longer term CD. As long as a customer does not need to access the money, investing in a longer term CD makes sense because the amount saved will earn more interest. In addition to asking about the rate, customers should ask how the bank will pay the interest and how the interest compounds. The shorter the compounding period, the more interest earnings the CD will generate.

After determining the interest rate, customers should decide when they will need access to the money. For money that customers will use within a year for a specific purpose, a shorter term CD will serve their needs. For early withdrawal, CDs with a term of one year or less generally incur a penalty of 90 days of interest; however, CDs with a term of more than one year generally incur a penalty of 180 days of interest. Each bank will have a unique policy, and account owners should know the penalty for early withdrawal before deciding on the term of their online CD.

For some customers, a strategy of laddering CDs will earn more interest while allowing easier access to the money. For example, a customer may purchase a one-year CD. When the CD comes to maturity, the customer can roll the amount into a two-year CD and purchase an additional one-year CD with more cash. As each certificate matures, the customer rolls the amount into a longer term CD. This ensures the money earns maximum interest while also guaranteeing some money will be available for withdrawal each year.

For investors who want to earn higher interest than they would with a savings account, investing in a CD makes sense. However, customers should always consider their options carefully before they invest. Before purchasing a CD from an online bank, customers should investigate the health of the bank. A bank may offer an attractive interest rate, but if the bank is not on sound financial footing, then the customer could lose the principal invested. An account owner should feel confident about the financial condition of the bank before opening an online savings account or CD.