The invisible cost of Saving Bank Accounts

Most of us think that Saving Bank Account is free and do not cost anything. This is not true and in fact, we pay indirectly to banks for saving bank account. Bank pay a very low interest on savings bank account and there are minimum balance requirements for most of the saving bank accounts.

Most private banks have minimum balance requirement of Rs10,000 and pay 3.5% interest rate versus 7% interest rates on liquid funds. So indirectly bank charges minimum Rs350 for your saving account. The cost to the account holder increase as you increase the balance in your saving account. I have seen people (particularly salaried) maintaining big balance in their saving accounts. e.g. if someone is earning 5 lacs a month and having 10 lacs balance (this is pretty normal) in his/her saving account is common, but it results in paying some Rs35,000 per year to the bank. The cost further increases if you keep more money in your saving bank account

There are few banks which pay higher interest rates on savings accounts. Like Kotak Mahindra and Yes Bank pay 5% interest on balances up to 1 lac and 6% on balances above 1 lac but they have limited branch and ATM network.

Most of the people (particularly salaried and small businessmen), unnecessarily keep big balances in saving bank accounts and they don’t need that much liquid money. One should analyze how much money they need for their regular expenses and keep that in saving bank accounts and some additional money for any urgent requirements. In my opinion, one should keep 6-9 months of expenses invested in liquid funds. The rest of the money should be invested in Medium-term and Long-term debt or equity fund depending upon the future requirement of funds.

In Mutual Funds (Liquid funds), one can get 7-8% returns and when one needs the money back, it will be created to his bank account within one working day. Medium / Long-term debt fund can give 9-10% returns compared to 7% in FD and they are much more tax efficient as well. Equity mutual funds can give up to 15% return and they are very tax efficient.

While deciding to invest into debt fund or equity fund, one should take into account the interest rate cycle and equity market valuation. I know that not everyone can understand this but one can always ask the expert and take decision easily. You need not be expert yourself to manage your money efficiently. Infect you should focus on your core skills and let the expert guide you to manage your fund.

My Suggestion: You may be incurring a very high cost and may not be even aware of it. Start analyzing your cashflows and investments. If you don’t have sufficient expertise take the help of the experts. You may incur some cost on a Wealth Advisor but it will be your best investment ever.

Thanks/Vipul

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