The average balance represents the average amount of money someone has in an account over an undefined period of time. The time period is undefined because it is up to the account holder or the lending institution to set the parameters. For instance, an individual might want to know the average monthly balance on their money market account to calculate interest received. Also, credit card companies might want to know the average daily balance so they can charge the cardholder the correct amount of interest. No matter the length of time, the formula for finding the average balance remains the same.
Learn the equation associated with average balance. The equation for average balance is the following:
Balance for Period 1 + Balance for Period 2 + Balance for Period 3 + ... / Total Number of Periods
Get the ending balance for each period. For example, say you were calculating average monthly balance of a checking account that started the month with $3,000 but ended with $2,500. You would use $2,500 in the equation because at the end of the month, the balance was $2,500.
Plug the variables into the equation. For example, suppose someone was trying to calculate his average daily balance over the course of a week on his credit card. The equation would read:
Sunday $500 + Monday $550 + Tuesday $575 + Wednesday $675 + Thursday $325 + Friday $325 + Saturday $350 / 7 = Average Balance (in this case average daily balance).
Note that in the equation above, it seems as if the person charged money Sunday, Monday, Tuesday and Wednesday, but it looks like they made a payment on Thursday, as his balance is reduced.
Perform the calculation. Utilizing the example from above, the calculation becomes:
$500 + $550 + $575 + $675 + $325 + $325 + $350 / 7 = $471.43 (when rounded)
If a credit card company was charging the person interest for that week, it would be based on $471.43.
- money money image by Valentin Mosichev from Fotolia.com