CDs and Ladders, How to Save Like You Mean It

falling steps made of one american dollar banknotes on green bakground
Little by little, your money grows | jansucko/iStock/Getty Images

CD stands for Certificate of Deposit. When you purchase a CD you agree to keep your hands off of your money for a set amount of time. The longer you are willing to let your money sit, the more interest it will accrue - both over time and at a higher rate.

CDs are extremely safe and a great place to park your money for a bit. If you've just made a bunch of money by selling a car or a house and you're not sure what to do with it, a CD is a good option to earn a bit while you figure it out.

If you decide to pull your money out early you will have to pay fees, typically by forfeiting several months of interest you've earned.

Something very cool you can do with CDs is to create a CD ladder and make your money really, really work hard for you. All the while you'll have fee-free access to parts of it annually in case the need should arise. Here's how CD laddering works:

You have $10,000 to invest

You buy 5 separate $2,000 CDs for one-, two-, three-, four-, and five-years

When your one-year CD is up, you use that money to buy a five-year CD

When your two-year CD is up, you use that money to buy a five-year CD

And so on, until you have 5 five-year CDs

Each year on your purchase anniversary you will have a CD ready to either cash out or reinvest

For you initial investment of $10,000 you will have made $855 in interest. That's $400 more than if you'd just parked it in a low-interest bearing savings account.

Savings accounts used to be a safe way to make a little bit of money on your money, but now? Forget it. The tiny amounts of interest you earn will be eaten away by inflation. If you have some money to put away and can afford not to touch it for a set amount of time, a CD might be your best bet.