How to Calculate an Average Balance

How to Calculate an Average Balance
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Whether it’s for a business or personal savings or checking account, knowing your average balance for specified time periods can help you keep enough money in your account to pay your bills and avoid fees. You can use average balances to help you estimate credit card interest charges. Depending on the time period(s) you’re looking at, calculating an average balance can be a quick task that takes just a couple of minutes.

Why Calculate Your Average Balance?

You can benefit from knowing your average balance in several ways. First, let’s say that you are looking at upgrading your checking account to one that requires you to keep a minimum monthly balance of ​$3,000​ to avoid fees. Calculating how often you maintained this balance during the past year will help you determine how realistic this will be for you to do.

Another benefit to knowing your average balance for a specific time period is to help you manage your cash flow so you can pay your bills. For example, if you know that you need at least ​$3,500​ per month to pay your bills from your checking account, you can review last year’s average monthly balances to see if this is realistic. If not, you might decide to pay your monthly cable, phone or electric bill using a credit card instead.

If you want to pay lower credit card interest, make your monthly payment earlier. Credit card companies charge you interest based on your average daily balance. The sooner you can reduce it, the less interest you’ll pay each month. You can use a weighted average balance to give you a good indication of what your charges are costing you.

You might also want to know your average monthly or quarterly balances on your investment accounts to see how they are performing.

The Average Collected Balance Formula

The easiest way to calculate the average monthly balance, or average collected balance, on an account, such as a checking or savings account, is to add your opening and closing balances for the month and divide them by two.

For example, if your opening balance on July 1 was ​$3,500​ and your closing balance on July 31 was ​$2,500​, you would add ​$3,500​ and ​$2,500​ and divide that number (​$6,000​) by two to get ​$3,000​. This means your average daily balance was ​$3,000​. This can be misleading because you might have spent ​$2,000​ on July 2 (almost emptying your account) and not deposited more money until July 25.

Depending on your reason for wanting to know your daily average balance per month, you might want to take a closer look at your daily balances or your individual transactions for the month to see how close you came to overdrawing your account or missing payments.

If you want to calculate your monthly average balance for one year, take your opening balance on January 1 and your closing balance on December 31, add those numbers and divide by 12 to get your average monthly balance. Again, this can be misleading if you need to maintain a minimum daily or monthly balance or plan your cash flow. If you want to know your average monthly balance for a quarter, you would add the beginning and ending balances for the quarter, then divide by three.

Use a Balance Calculator

If you are checking the average balance using more than a few amounts, you might want to use an average balance calculator, like the Current Account Monthly Average Balance Calculator offered by ICICI Bank. These tools can help you calculate your daily balances, in addition to your monthly balance.