High up on the list of lamest money mistakes is keeping a high balance in a chequing account.
Chequing accounts pay trace levels of interest, at best. Better to keep big balances in a high-rate savings account, right?
Generally, yes. But if you’re a personal finance keener who is open to some contrarian thinking on holding cash, then parking a big balance in a chequing account makes surprisingly good sense.
You don’t hear as much about it these days, but banks used to take a lot of flak over the various account and service fees they charge customers. One way to deal with this criticism is to waive or reduce fees for seniors, students, youth and clients who keep a sizable minimum balance in their account.
Bank of Montreal, Bank of Nova Scotia and Toronto-Dominion Bank eliminate or rebate the monthly fee on mainstream chequing accounts with unlimited transactions if you maintain a balance of $4,000. Canadian Imperial Bank of Commerce requires a $3,000 balance (and have a recurring direct deposit or two preauthorized payments a month) and National Bank of Canada sets a minimum of $4,500 to avoid a flat monthly fee.
The big banks do the same thing in their deluxe chequing accounts, for which the bloated monthly fees can reach $30 or so. To get this cost waived, you need to keep $5,000 or $6,000 in the account.
Of course, there’s free chequing for everyone at online banks such as Alterna Bank, motusbank, Simplii Financial and Tangerine. But most Canadians are married to the big banks and won’t try these worthy alternatives. If that’s you, then consider keeping a block of savings in a chequing account to eliminate fees.
The most popular chequing account these days is the unlimited account, which typically lets you make any number of debits and e-transfers at a cost of $15 or so a month. The appeal of these accounts is the certainty of knowing you can bank your brains out and not incur charges beyond the monthly fee. The downside is that $15 a month is a not inconsiderable amount to pay your bank every month for services you can get for free elsewhere.
Annually, paying $15 a month adds up to $180 a year. On a $4,000 balance – if those fees were eliminated – that’s like a 4.5-per-cent benefit. On a deluxe chequing account with fees of $30 a month and $360 annually, parking $6,000 in an account to eliminate fees is a benefit of 6 per cent.
Good luck finding risk-free returns of this size in the banking or investing world. Five-year guaranteed investment certificates pay 2.5 per cent to 2.85 per cent these days at best, while high interest savings account rates top out around 2.3 per cent in most cases.
Consultant David McVay of McVay and Associates said the average chequing account balance is around $4,000 to $5,000. “But that average is quite skewed by people who have a lot more than that,” he said. “A lot of older people like to have large balances just to be comfortable, and lot of rich people have a large balance because it doesn’t seem large to them.”
Mr. McVay says the monthly fee waiver for high chequing account balances is a way for banks to retain these high-balance clients. Banks like these customers a lot because they often have other products with the bank, and the piles of money sitting in their accounts can be used to profitably lend out.
The weak spot in the strategy of keeping a block of cash in an account to avoid fees starts with the fact that you have to maintain the minimum balance for the entire month to get your fee waived. If you fall below that level for a microsecond, expect your bank to notice and charge you the monthly fee.
To avoid this risk, you might be tempted to keep more than $4,000 or whatever amount in your chequing account. But as your chequing account balance rises, the benefit of avoiding monthly account fees starts to recede.
To get the best bang for the megabucks you keep in a chequing account, take the amount of the fees you’re saving and add it to your savings each month or year. Even if you don’t, you’ll have $180 and up each year to spend on yourself rather than having it added to your bank’s profits.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, November 12, 2019