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BY NITIN SHAH
Nitin Shah is Chairman & CEO of Embassy National Bank, a community bank located in the Atlanta suburb of Lawrenceville which is one if the leading SBA lenders in the southeast. He also owns hotels and commercial real estate as President of Imperial Investments Group, so he is keenly aware of the small business perspective in today’s economic environment. A former Chairman of the Asian American Hotel Owners Association (AAHOA), Shah’s e-mail address is nitinshah@embassynationalbank.com for questions.
In today’s economy, everyone wants to protect their savings from huge market swings. A technique that can give you peace of mind is to “ladder” your certificates of deposits.
Here’s how “laddering” works: instead of putting a lump sum into one certificate of deposit (CD), you divide the funds into a series of certificates of various maturities.
Let’s assume you have $25,000 to place in a certificate of deposit. Split the money into $5,000 increments and buy five CDs – one with a one-year maturity, another with a two-year maturity, a third with a three-year maturity, a fourth with a four-year maturity, and finally one with a five-year maturity.
As each CD matures, roll the money into a new five-year certificate – assuming you don’t need to spend the cash on something specific.
Do this every year and you’ll maintain a balanced ladder of CDs ranging from one to five years because if rates go up you’ll earn more on the higher-yielding new certificates – and if interest rates drop, your longer-term CDs help protect you from the lower rates.
“Laddering” has two strong benefits that make it a smart and safe way to save:
• you’ll hedge interest rate risk – which is especially desirable given the current fluctuation and uncertainty of interest rates, and
• you’ll keep cash flowing back into your hands – which is handy if you prefer not to lock up money at a given rate for an extended period
Your deposit accounts are insured up to $250,000 per bank by the Federal Deposit Insurance Corporation (FDIC), as part of economic recovery legislation passed by Congress during both the Bush and Obama Administrations.
Discuss the “laddering” of CDs with your banker or your financial advisor to learn more details and to determine if the technique is right for you.
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