Many financial institutions waive their monthly service fees if you maintain a minimum monthly balance in your account. Depending on the institution and the type of account, minimum balances range from $500 to $5,000.

But is it a perk or a cost?

Whenever you run into a situation where you are getting a cost saving, you should consider your opportunity cost. In other words, by keeping this money in a bank account at low interest, you forego other uses for that money. You could use that money to pay down a loan rather than keep it in your bank account to save the monthly service fees.

How much is a minimum balance costing you?

Illustration one

Jake 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 3.0%.

By maintaining the $1,000 minimum balance, Mr. Smith saves $78 ($6.50 multiplied by 12 months of fees)over the course of the year.

But if Mr. Smith took that $1,000 and bought a one-year GIC, it would earn $30 in interest over that year before tax. If we take off taxes, he would have about $22 left.

In this example, it is to Mr. Smith's advantage to keep the $1,000 in the bank account to avoid the monthly fee of $6.50 until he finds an investment with an after-tax return higher than 7.8%.

Illustration two

If Janet Doe maintains a minimum monthly balance of $5,000 in her chequing account, her monthly fees of $12.00 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 a hypothetical interest rate of 5%.

It is to Ms Doe's advantage to invest in the GIC because the interest earned is higher than the fees paid. By keeping the minimum balance, Janet would save $144 in fees ($12 multiplied by 12 months) over one year. But if Janet invested the $5,000 at 5%, she would earn $250 in interest, which is considerably more than the $144 in fee savings. Even if we take off taxes, Janet would be better off to invest the money in a GIC and pay the bank fees.

The bottom line

Take the time to determine the benefits and the alternatives to keeping a minimum balance in your bank account. The higher the minimum balance and the higher the rates offered by alternative investments, the more likely it will be that a minimum balance in your bank account will be a cost.

There are myriad banking alternatives and many new high-interest bank accounts that allow you to earn higher returns with lower or no fees. Shop around and you may be pleasantly surprised at what you will find. Bank accounts with a minimum balance requirement may not be as much of a perk as you think.

This column first appeared on June 7, 2005

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Jim Yih is author of Mutual Fundamentals and Seven Strategies to Guarantee Your Investments. He is the founder of CORE Financial Advisors and Account Representative of Manulife Securities International Ltd. Commissions. Jim can be reached through his Web sites Wealthweb.ca, Retirehappy.ca, COREFinancial.ca and JimYih.com.