Banks typically require a minimum average balance to avoid monthly fees. But what is the minimum? What are some tips and tricks that can help you achieve it?
The problem of minimum average balance is that most people don’t know about it until they get hit with bank charges in statements. And even then, many still can’t figure out how much money they need in their saving, checking, or current account each month.
In this ultimate guide, we’ll show you some tips and tricks to achieving Average Minimum Balance (MAB).
Before getting into the nitty-gritty of Average Minimum Balance, here are some things that can help you understand it better.
What is the average minimum balance, and why should you care about it?
The minimum average balance is the least amount of money that a person needs to keep in his account every month or Quarter. It’s one of those rules or regulations imposed by banks which can either help you save a lot on monthly bank charges or do the exact opposite.
The minimum monthly average balance is the most common requirement, but a few banks need a quarterly average balance instead. However, the calculation of both balances is similar.
Banks charge you – handsomely – for not maintaining the Minimum Average Balance. Even if it’s just a little, say Rs 100 less than the Minimum Average Balance and your account is in the red, you will still be hit with charges!
Some banks can also close down your account or make it dormant if you don’t keep the Minimum Average Balance.
On top of this, the Minimum Average Balance requirement can also prevent you from opening an account in the first place because sometimes banks won’t let you open an account without an Average Minimum Balance because they need to know that you can afford it! This is regardless of how much money you are depositing in the account.
What is the formula for calculating Minimum Average Balance?
The Average Minimum Balance is calculated based on account type (current, savings, chequing, etc.) and the Minimum Average Monthly Balance requirement.
First, let’s understand how to calculate the Minimum Average Monthly Balance for Regular Savings or Savings accounts.
To calculate MAB, you’ll need to take the average end-of-day/daily closing balances in a given month. For a 31-day month, the average is calculated by adding the closing day balances for all the days in the month and dividing it by 31.
If you’re still having trouble remembering how to do it, here’s a quick formula:
MAB = (Sum of all the daily closing balances)/(Number of days in the month)
Imagine that you have a Savings Account with the bank, and they require you to maintain an average minimum balance of Rs.10,000. In January 2022, your daily balance looks something like this:
Jan 1: Rs.15,000
Jan 2: Rs.17,500
Jan 3: Rs.10,000
Jan 4: Rs.12,500
… and so on until Jan 31
Now to calculate your Minimum Monthly Average Balance (MAB) in January 2022, you would simply plug the daily closing balances into the following formula:
MAB = (Rs.180,500)/(31) = Rs.6,066.36
Suppose you do not maintain this Average Minimum Balance in your account by the end of every month. In that case, there may be a service charge on the account status.
If you hold, Saving Account in HDFC Bank, you can calculate the MAB here.
Why do banks impose a Average Minimum Balance requirement?
There are a few reasons why banks impose a Average Minimum Balance requirement.
The first reason is to ensure that customers have enough money in their accounts to cover their transactions. This helps prevent customers from overdrawing their accounts and paying hefty bank charges.
The second reason is to ensure that customers can properly use the bank’s services. This includes things like cheque writing, online banking, and ATM withdrawals.
The third reason is to ensure that customers are not defaulting on their payments. This is especially important for banks that offer loans and credit products. If too many customers are defaulting on their payments, it can hurt the bank’s financial standing, potentially leading to the bank closing its doors.
On top of these reasons, Minimum Average Balance requirements also allow the bank to generate additional revenue. Minimum Average Balance requirements are different for each account and vary from bank to bank and account type (current/savings). Banks can only set minimum Average Balances, and you cannot negotiate Minimum Average Balance requirements with them.
What should you do if your minimum average balance isn’t met?
You should either transfer money to your account so that the balance is above the minimum average required, or you should find a different bank that doesn’t have a Average Minimum Balance requirement.
Tips and tricks to help you achieve your Average Minimum Balance .
Here are the tips and tricks to help you achieve Minimum Average Balance:
1. Understand the basics.
Minimum Average Balance is the lowest balance you need to maintain in your chequing account or savings account to avoid monthly service charges.
With an Average Minimum Balance, you’ll never have to worry about fees again!
To compute MAB, you must sum the end-of-day/daily closing balances for a given month and divide by 30. The average is calculated by adding all the closing day balances for the month’s days and dividing by 31 for a 31-day month.
2. Choose the right account type
If you’re having trouble meeting Minimum Average Balance requirements, consider choosing a different account type. Some banks offer accounts that don’t have Minimum Average Balance requirements.
You can also choose to open a Savings account, which usually has a lower Average Minimum Balance requirement than a chequing account.
Many Private and Public Banks offer Zero balance Savings accounts to help you avoid the Minimum Average Balance requirement.
3. Transfer money between banks
If you are maintaining Minimum Average Balance requirements with multiple accounts, consider transferring money between banks or even bank branches if necessary.
4. Use online banking to your advantage
If your Average Minimum Balance requirement is small enough and you use an online account, consider doing your banking online. This will help you avoid monthly fees and Minimum Average Balance requirements altogether.
However, if you use an online account, make sure that you set up alerts on your account to closely monitor your balances and transactions.
5. Don’t open multiple accounts
Another way to help you meet Average Minimum Balance requirements is to not open multiple accounts. This will help simplify your banking transactions and make it easier to keep track of your account balances.
6. Keep track of your expenses.
Another way to help meet Average Minimum Balance requirements is by keeping track of your expenses. This will help you to better understand where your money is going each month and how much you’ll need to save.
7. Use Auto-Sweep Options
Auto-Sweep Options are a great way to ensure that you never fall below the Average Minimum Balance . Auto-Sweep Options allow you to automatically transfer money from your chequing account( Deposit Account) to your savings account when the balance in your chequing account falls below a certain amount. This will help you avoid monthly service charges and Minimum Average Balance requirements.
For Example, You can set up an Auto-Sweep Option so that when your Minimum Average Balance falls below Rs.1,000.00, the bank will transfer a certain percentage of money from your Fixed Deposit account to your savings account.
8. Make lump-sum deposits
If you know that you’re going to be short on funds for a given month, make a lump sum deposit to your account to help raise the balance above Average Minimum Balance requirements. This will help you avoid any fees or service charges.
Final Thought
The minimum average balance is a low barrier to entry for banks, but that doesn’t mean it should be easy. In fact, the more difficult you make it for yourself, the better because this will instill good habits and discipline in your spending patterns.
Follow these eight tips and tricks to help you achieve a MAB at all times without too much hassle or difficulty.
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