How to Calculate Average Monthly Balance

The average monthly balance is a calculation that provides a smoothed view of funds in an account over a specific period, typically a calendar month. It helps understand the typical amount of money available, rather than a single snapshot. This metric is relevant for individuals and businesses, offering insights into financial habits and account activity.

Understanding Average Monthly Balance

The average monthly balance represents the typical amount of money in a financial account over a 30- or 31-day period. This calculation reflects the account’s usage and liquidity over time, moving beyond a single point-in-time balance. Financial institutions often use this average to assess account activity and determine various conditions. To calculate it, you need either the daily closing balance for every day of the month or a comprehensive transaction history. The transaction history includes the opening balance, all deposits, and all withdrawals for the entire period.

Calculating with Daily Balances

Calculating the average monthly balance is straightforward with daily closing balances. The process involves summing each day’s end-of-day balance and then dividing by the number of days in the month.

For example, if an account had daily balances of $100, $150, and $110 for three days, the sum would be $360. Dividing $360 by 3 days yields an average balance of $120 for that period.

Calculating with Transactions

If daily balance figures are not directly available, the average monthly balance can be calculated using a detailed transaction history. This method tracks how the account balance changes day by day due to financial activities, providing a way to reconstruct the daily balances.

Start with the opening balance for the first day of the month. For each subsequent day, adjust the balance by adding deposits and subtracting withdrawals. Keep a running record of the balance at the close of each day throughout the month.

Once you have an end-of-day balance for every day, sum these daily balances. Then, divide this total sum by the number of days in the month.

For instance, if an account began with $500, had a $100 deposit on Day 2, and a $50 withdrawal on Day 3, the daily balances would be $500 (Day 1), $600 (Day 2), and $550 (Day 3). These daily balances can then be averaged.

Why Average Monthly Balance Matters

The average monthly balance holds practical significance for account holders. Banks use this metric to determine interest earned on savings accounts; higher average balances often lead to greater interest payments.

Financial institutions also consider the average monthly balance when applying fees, such as monthly service charges. Maintaining a certain average balance can waive these fees, which can range from a few dollars to over $25 per month.

For individuals and small businesses, managing the average monthly balance is a valuable component of financial health. It aids in tracking cash flow, assessing fund liquidity, and making informed spending and saving decisions.