A certificate of deposit (CD) is a type of low-risk savings account that can boost the amount you earn in interest in exchange for keeping your money deposited for a set amount of time.

Like savings accounts, CDs are generally considered low risk because in most cases they are insured up to $250,000 by an independent government agency, the Federal Deposit Insurance Corporation (FDIC). CDs generally offer more competitive interest rates than traditional savings accounts.

If you need your money before the CD’s term ends, you’ll likely pay an early withdrawal penalty, which can significantly reduce the interest you earned on the CD. The penalty is typically calculated as a number of days (or months) worth of interest—for example 150 days’ worth of interest—that can vary by the bank and term of the CD. A savings account is an important tool for short-term savings, so you have some money that’s easily accessible. Your emergency fund, for example, should be in a savings account.

CDs come in varying terms and may require different minimum balances. The most common terms are three months to five years, though they can be as short as a month or as long as 10 years.

In general, CD interest rates are driven by the Federal Fund Rate that is set by the Federal Reserve. Beyond that, CDs with longer terms and higher balance requirements tend to pay higher interest rates—but that’s not always the case. For example, long-term CDs may have lower rates than short-term CDs if interest rates are expected to fall. Make sure you shop around and review the rates and terms to pick the product that best fits your current needs.

Descriptions of CDs often include the APY—or annual percentage yield—of the account. Like savings accounts, CDs earn compound interest, meaning that the interest you earn—based on the fixed interest rate of the account—is periodically added to your principal. Then that new total amount earns interest of its own. APY refers to the amount you earn in one year, taking compound interest into account.

Two CDs offering the same interest rate and the same term may have different APYs if their frequencies of compounding interest and crediting the account are different—say, daily vs. monthly. APY is a helpful number in comparing CDs of different term lengths because it always represents a CD’s annualized return.

Then shop around for a CD that balances term and rate in a way that fits your goals. If you need the money soon, consider a CD with a shorter term or a CD that offers penalty-free withdrawals. If you’re saving for something five years down the line, a CD with a longer term may be more beneficial.

It’s important to consider where interest rates might be headed before investing in CDs. If rates are falling or expected to fall, locking in a rate for the long term can be beneficial.

If rates are rising or expected to rise, consider whether the flexibility of shorter-term CDs makes more sense. Once the CDs mature, you can revisit how your money is kept in CDs. One way to account for rate changes in your savings strategy is to build a CD ladder (see below).

A CD ladder is a strategy for investing your money in long-term CDs while making sure you always have access to some of it in the short term. The “ladder” is made up of multiple CDs with staggered maturity dates. As each CD matures, you have the choice of reinvesting it in another long-term CD or using the cash for another purpose if the need arises.

To start a CD ladder, you can divide the money you want to save across progressively longer-term CDs—for example a 1-year, 2-year, 3-year, 4-year and 5-year CD. Then as each CD matures, you reinvest that money into a 5-year CD, creating the “ladder” that you can continue as long as you wish.