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How to calculate Minimum Average Balance and avoid penalties

As you would be aware, you can be penalized by your bank, in case you do not maintain the specified Minimum Average Monthly (or in some cases Quarterly) Balance in your Savings Account.

The minimum average monthly / quarterly balance typically varies from Rs.1000 [in public sector banks] to Rs.10,000 or even more [in private sector banks]. And the penalty is around Rs.100 to Rs.500.

Let us suppose that your bank has stipulated Rs.5,000 as the Minimum Average Balance you must have in your Savings Account. Now, it is important to note that you DON'T have to ALWAYS keep at least Rs.5,000 in order to avoid the penalty. No. The operative word is "average". In other words, the average of the daily balances should not drop below Rs.5000. Let us see how to calculate this Average Balance.

Given below is an example of daily end-of-the-day balances in your account for the month of May:

01-May 3,000 
02-May 5,000 
03-May 8,500 
04-May 7,250 
05-May 7,250 
06-May 7,250 
07-May 7,250 
08-May 7,250 
09-May 7,250 
10-May 7,250 
11-May 7,250 
12-May 7,250 
13-May 7,250 
14-May 7,250 
15-May 7,250 
16-May 7,250 
17-May 7,250 
18-May 20,000 
19-May 3,000 
20-May 1,500 
21-May 1,250 
22-May 1,250 
23-May 1,250 
24-May 1,250 
25-May 1,250 
26-May 1,250 
27-May 1,250 
28-May 1,250 
29-May 1,250 
30-May 1,250 
31-May 1,250 

Sum total of daily balance = 1,56,250
No. of days in the month = 31
Average balance = 156250 / 31 = 5,040

Extremely simple and straightforward. 

Savings Accounts pay a miserly 4% p.a. interest. So it makes ample sense to keep just the bare "minimum" money in such accounts. However, to avoid paying any penalty it is a good idea to always check the 'average balance' a few days before the end of the month and deposit the required amount, if any, to take it above the minimum mark. 

[By the way, there is one area where "minimum" must be avoided at all costs. Read 'Minimum Amount Due means Maximum Financial Destruction']

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