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One of the most basic ways to save money is to invest in cash through some sort of savings account. This is considered a rule of personal finance, and many of us save money this way, using a traditional savings account or an online high yield savings account to house our emergency funds and even to help build our retirement savings. Because cash is relatively safe and liquid, it is often considered a cornerstone of a portfolio that needs a little protection. And, of course, cash is ideal for emergency funds since it is easily accessible.

However, cash earns a very small return as a result of its safety and liquidity. Even a high yield savings account — especially right now with the low rates — is hard pressed to beat inflation. You can earn a little more, though, if you consider CD rates. And you increase the liquidity of these investments through the strategy of CD laddering.

CDs: Higher cash returns

You can get higher cash returns when you use certificates of deposit. These cash investments often return between 2% and 6% annually, depending on how much you put into the CD, and how long you have the CD for. Some CDs might still be unable to beat inflation, but your returns will be eroded less than if you went with a straight savings account.

It is important to be aware of possible penalties, though. Most CDs come with high fees if you withdraw your money before the term expires. So as you put together your CD investing plan, make sure that you are careful to consider this option.

CD laddering

One of the most popular ways to use CDs is through laddering. In this strategy, you carefully stagger the CD terms so that you regularly have access to your money. How you do this can be done based on your goals for the cash you are using:

1. Long-term savings CD ladder: If you have a longer period of time, you can set up a five-year (or seven-year) CD ladder. Divide the money you have in your savings account into equal amounts. If you are concerned about have access to immediate funds, leave a couple thousand in your savings account. If you have $10,000, and you decide to leave $2,000 in your account, that leaves $8,000 for your CD ladder. Put $1,600 ($8,000/5) into each CD. One CD should have a maturity of one year, the next should have a maturity of two years, and so forth. Your five-year CD will probably earn the highest return. After the first CD matures in one year, roll that money (and any extra you might have) into a new five year CD, to mature in year six of your plan. As you can see, every year, a CD matures, and you can get access to the money if you need it, or you can put it in a longer term CD with the higher yield.
2. Short-term emergency CD ladder: If you want more immediate access to your money, you can apply the same principle on a shorter time scale. Get CDs in three-month, six-month, nine-month and 12-month intervals. The yields won’t be as high as when you do a long-term ladder, but most of them will likely beat your savings account yield (at least for now). After the three month CD matures, roll it into a 12-month CD, and you can keep the ladder going. And you know that every three months you will have access to that money if an emergency situation arise.

A CD ladder can be a good way to organize your cash savings. Just remember that in order to truly overcome the ravages of inflation, you will have to have other investments; you can’t rely solely on cash. But a good CD laddering strategy can help you get a little more out of what cash you do have.