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Potential benefits of maintaining a minimum monthly balance
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 $1,000 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 banking 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 GIC1.
| 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 3%2, compounded annually.
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 |
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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.
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%. |
1. Although the examples above are intended for illustration only, the figures used approximate the actual package options available at several major Canadian financial institutions.
2. Effective rate on October 17, 2006 (average of five major banks).
