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How Do Banks Calculate The Monthly Average Balance For Interest And Fall-Below Fees

You don’t need to maintain the minimum average balance throughout the entire month.

It’s not uncommon for many of us to have multiple banking accounts that cater to our various financial needs, such as savings, current, fixed deposits, or even business banking accounts. While opening a bank account is typically free of charge, it’s essential to understand the additional ongoing obligations that must be met to maintain a cost-free banking service.

One commonly overlooked requirement is the maintenance of the minimum monthly average balance (MAB) for savings and current accounts. This affects not only how the interest on the funds in the account is calculated but also whether a monthly service fee will be charged.

What Is Monthly Average Balance Or Minimum Average Daily Balance

The monthly average balance (MAB), also known as the minimum average daily balance (MADB), refers to the minimum amount of money that you, as an account holder, need to maintain in your banking account (i.e., savings or current account) over a specific month. The minimum amount could typically range between $500 and $200,000, depending on the banking account.

If the balance falls below this minimum amount, you will incur a service charge of between $2 and $50 per month. The higher the value of the banking account, the higher the monthly average balance requirement and fall-below fees will be.

A common misconception is that the MAB is the minimum threshold that the account balance can ever touch in a month. However, this is not true, as the calculation for MAB takes into account the average balance at the end of each month.

How To Calculate Monthly Average Balance For Interest And Fall-Below Fee

Most banks calculate the monthly average balance using the end-of-day or daily closing balance in the account, summed up over the given month to determine the monthly average balance.

In other words, the MAB can be easily calculated using a simple formula:

MAB = (The Total Of End-Of-Day Closing Balances) / (Number Of Days In The Month)

To understand this better, let’s look at an example of how this works, assuming the savings account has a minimum MAB of $1,000.

Assume you made an initial deposit of $2,500 in your savings account and maintained the balance for the first 5 days. Over the course of the month, withdrawals were made, including a 4-day period where the closing balance was under the MAB of $1,000. However, the balance was shored up towards the close of the month, with an ending balance of $1,800.

Days Total Days
Daily Closing Balance
A x B
First 5 days 5 $2,500 $12,500
6th to 12th day 7 $1,500 $10,500
13th to 16th day 4 $1,000 $4,000
17th to 20th day 4 $800 $3,200
21st to 28th day 8 $1,500 $12,000
29th to 31st day 3 $1,800 $5,400

Using the formula, the monthly average balance for the savings account would amount to:

MAB = ($12,500+$10,500+$4,000+$3,200+$12,000+$5,400) / 31

= $47,600/31 = $1,535.48

Based on this, you would be able to meet the minimum monthly average balance requirement and would not incur any additional service charges despite the 4-day period where the daily balance was below the $1,000 MAB requirement.

Similarly, the interest on the funds is also calculated on the end-of-day balance by applying the interest rate, rounded off to the nearest 2 decimal places, before the entire month’s interest is summed up. The bank will then credit the interest earned on a monthly basis on the first working day of the following month.

Why Banks Enforce Minimum Monthly Average Balance

The minimum monthly average balance is not just a random number generated by the banks to get you to pay penalty fees by imposing a strict requirement. In fact, there are two key reasons for banks to impose the MAB.

One is that it is a way for banks to assess account holders’ income stability and credit score for future loan approvals. Lapses in maintaining the MAB could be an indicator that the account holder has an irregular income source or an unpredictable spending pattern.

Second, banks use the deposits of account holders for different purposes, including lending the funds. By encouraging account holders to maintain a minimum balance in their accounts, the banks would have better visibility of their cash holdings for deployment in other investment opportunities. It also allows them to recover the operational costs of providing the banking service when the MAB is not maintained.

Tips To Maintain Monthly Average Balance

If we are not observant of our savings and spending habits, we could end up paying a small fee each month needlessly as fall-below fees. Instead, adopt the following tips to avoid paying such penalties and grow your savings.

#1 Consider Your Banking Needs When Choosing An Account

Weigh your needs when choosing a banking account. Some accounts, like those offered by digital banks, may offer zero minimum balance requirements. However, they may also come with a limited range of services compared to banking accounts that impose a higher minimum monthly average balance.

If the limited range of services meets your needs and expectations, then it is better to choose an account that doesn’t charge any fall-below fees. There is no additional benefit to using an account that provides more services than you require and also imposes a high minimum average balance.

#2 Avoid Multiple Bank Accounts

Having too many banking accounts may not only make it difficult for you to track each account, but it also spreads your savings across many banking accounts. This could make it more challenging to maintain the minimum balance across all banking accounts, especially if you have a small amount of savings.

Instead, you might be better off with one or two banking accounts that serve your different needs and allow you to meet the MAB requirements easily.

#3 Make Lump Sum Deposits

A simple way to meet your banking account’s MAB requirements is to deposit in lump sums. For example, if an account requires you to maintain a MAB of $500, you could either maintain $500 in deposits throughout the month or make a $15,000 deposit on any one closing day. In both cases, you would be able to maintain the MAB of $500, even if, in the latter case, you had a zero balance on all days with only a single-day closing balance of $15,000.

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