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 The
Companion Advisor: Techniques
& Methods
Potential benefits of maintaining a minimum
monthly balance
Contributed by The Financial Consumer Agency
of Canada
A Companion Advisor Article
Many institutions waive the monthly service fees if
you maintain a minimum monthly balance in your account. Depending on the
financial institution and the type of account, minimum balances range
from $500 to $5,000. On most accounts, however, the minimum balance is
generally $1,000 or $2,000.
Maintaining a minimum monthly balance can often waive
the monthly fee associated with your services package. However, any cost
savings should be compared to the returns or other opportunities you forego
by keeping your money in your bank account (this concept is known as "opportunity
cost"). For example, if you have a loan, it may be more cost effective
to pay it down than to keep the funds in your bank account to save the
monthly service fees.
The illustrations below demonstrate that, when compared
to conservative investment options (Guaranteed Investment Certificates
or GICs, for example), you can save much more by maintaining the minimum
monthly balance in your account, than you would earn if you invested the
amount in a GIC*.
Illustration 1: Current Situation - Minimum Balance
of $1,000
Mr. Smith has a chequing account at a financial institution
where, if he maintains a minimum monthly balance of $1,000, his monthly
fees of $6.50 are waived. As an alternative to keeping $1,000 or more
in his account, Mr. Smith could invest these funds in a one-year GIC,
with an interest rate of 1.06% **, compounded annually.
Annual savings from monthly
minimum balance ($6.50 x 12) |
Return on a $1,000
investment in a GIC |
| $78 |
$10.60
(before income tax) |
In the example above, it is to Mr. Smith's advantage
to maintain the minimum monthly balance in his account until he finds
an investment with after-tax returns higher than 7.8%.
Illustration 2: Hypothetical High Interest Rate
Situation Minimum Balance of $5,000
Ms. Doe has a chequing account at a financial institution
where, if she maintains a minimum monthly balance of $5,000, her monthly
fees of $24.75 are waived. As an alternative to keeping $5,000 or more
in her account, Ms. Doe could invest these funds in a one-year GIC, with
an hypothetical interest rate of 5%, compounded annually.
Annual savings from monthly
minimum balance ($24.75 x 12) |
Return on a $5,000
investment in a GIC |
| $297 |
$250
(before income tax) |
In the example above, it is to Ms. Doe's advantage to
maintain the minimum monthly balance in her account until she finds an
investment with after-tax returns higher than 5.94%.
Notes:
* Although the examples above are intended for illustration only, the
figures used approximate the actual package options available at several
major Canadian financial institutions.** Effective rate on February 1,
2002 (average of 7 major financial institutions) Extracted with permission
from the Financial Consumers Agency of Canada's publication Consumer's
Guide to Basic Banking Services booklet dated March 2002.
Source:
Consumer Information - Potential Benefits of Maintaining a Minimum Monthly
Balance (www.fcac-acfc.gc.ca), 2003 © Financial Consumer Agency of
Canada, Reproduced with the permission of the Minister of Public Works
and Government Services Canada, 2003.
* * *
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