Before you shop for a CD, there are two numbers you need to know:

• APR —The annual percentage rate, or the interest rate a bank is offering on the CD.

• APY —The annual percentage yield, which tells you what you’ll earn over the multiyear life of the CD as your money “compounds.”

Yikes, what’s compounding? Put simply, it’s how your investment gets bigger and bigger over time. For example, let’s say you invest $10,000 in a three-year CD earning 5% annually. In the first year, your $10,000 investment will earn $500. In the second year, 5% of the new total ($10,500) will be $525. In the third year, 5% of $11,025 will be about $551. That’s compounding.

Steps to take if a CD is an ideal investment for your cash:

1. Choose your term. Determine how long you want to tie up your money. This will depend on when you need it or if you have other cash assets to tide you over until the CD matures.
2. Pick your type. Decide which type of CD will be best. For example, if you want to invest for two years and don’t want the risk of being stuck with a low rate, then a bump-up CD may be ideal. Afraid you’ll need part of your deposit for an emergency? Consider a liquid CD.
3. Review the rates. Once you’ve selected a time period and CD type, find out about rates here.

Consider a ladder
One way to reduce a CD’s drawbacks is to use a technique called “laddering.” This strategy gives you regular access to part of your cash and protects you against rising interest rates.

Laddering is simple. Instead of investing one big chunk of cash in one CD, you divide your lump sum into equal parts and invest each in CDs of varying durations.

Here’s how it works: Let’s say you want to invest $15,000. You’d invest $5,000 in a 1-year CD, $5,000 in a 2-year CD and $5,000 in a three-year CD. Then, each time one of the three CDs matures, you’d either take the cash or re-invest it in another three-year CD to keep your ladder in place.

As you can see, laddering provides three cool benefits:

• Penalty-free access to cash each time a CD matures.

• More favorable interest rates, since you’re always investing in a longer-term CD.

• A shot at better returns if interest rates are higher when you re-invest.