Finally! You've got a little extra cash and it's headed straight for your savings account. But before you add more to that pile, consider a CD – otherwise known as a certificate of deposit. While this kind of CD won't make you dance, it can make you money and just might be the perfect companion to your savings account.

CDs are short-term savings accounts, usually FDIC or NCUA insured, that earn interest. When you open one, you are agreeing to leave a certain amount of money in it for a set period of time. In exchange for leaving this money in the account for the designated period, you earn interest. The interest you earn is periodically re-invested (usually monthly) into the initial amount you deposited (the principle), earning you more interest. That's called compounding. The great thing about CDs is that they typically earn a higher interest rate than a regular savings account (and that means more money for you).

• You can lock in a decent interest rate with a CD. For example, if you open a one-year CD at a 5-percent-fixed APR, your CD rate stays at 5 percent until the end of the period. Other accounts, like a savings or money market account, can be subject to dropping interest rates.
• Early withdrawal penalties may discourage you from tapping into your CD before it matures.
• Use a CD to help establish or re-establish good credit by using it as collateral for a small loan. You borrow up to the amount in your CD, and then make regular payments on the loan.
• CDs are affordable to start. The stock market and mutual funds can be lucrative investments for extra income, but start-up minimums may be out of reach. Some financial institutions have CDs with minimum opening balances of $500, while others require only $5.
• CDs are a good option for young savers who only have a little disposable cash and can't afford high-risk investments yet.

• CD terms vary from one month to five years, but once you've locked into a term, you usually can't withdraw your money without paying a penalty. If you need all of your cash to be readily available at any given moment, then CDs aren't for you.
• While CDs are a good way to save for a short period of time, they may not be the best long-term investments. If you're saving for more than five years down the road, talk to a professional about other options, such as mutual funds or stocks, which can earn higher returns.
• A fixed-rate CD that keeps you at a high interest rate as other rates fall is a good thing, but that same CD can keep you earning at a lower rate when rates rise.

• Some institutions offer CDs that you can add money to after you open the account. Check to see if a CD allows "additional deposits" if you're looking for this feature.
• Variable-rate CDs change their interest rates along with the market. This allows you to take advantage of increasing rates, though you're also prey to falling rates.
• Make sure to shop for the best rate before starting a CD. Some financial institutions may match competitors' rates to keep your business. Visit bankrate.com to compare up-to-date CD rates in your area.
Basically, CDs are good for short-term savings, such as saving for a car, college expenses, or even a home. A regular savings account is great for emergency funds, but why not toss your disposable income into a CD and let it collect higher interest? Then when you're ready to use it, you'll have even more than what you started with!

Sources:

investopedia.com; bankrate.com; fdic.gov; ncua.gov; sec.gov; consumerfed.org