What is an account balance? | Financial Literacy
When you log into your investment accounts, the first thing you’re likely to check is the account balance. The higher it is, the happier you are! But what is an account balance, really? This is something we all know about, it also offers some hidden information worth exploring beyond the current figure displayed as the balance.
At first glance, the account balance is the total amount of money present in that account, i.e. the sum of all debit and credit transactions. It is a changing number that goes up and down depending on the transactions. This makes it an indicator of your personal cash flow. And, even beyond that, it’s a representation of your total net debt or purchasing power. Needless to say, this is a number to pay attention to, regardless of the account.
Current vs available balance
Many people get confused when they log into an account and see two numbers: Current balance and available balance. Although these may imply the same thing or even reflect the same number, they are actually different.
- Current balance is the account balance which includes all money in the account and funds held pending transaction.
- Balance available represents only the money available in your account outside of pending transactions.
For example, you can open your account to see a current balance of $1,000 and an available balance of $800. If you investigate further, there are probably $200 in pending transactions. Therefore, the current balance takes this into account, while your available balance anticipates how much you will have left.
Account balance vs available credit
When it comes to credit cards, there is also available credit to consider. These accounts usually also display two digits: account balance and credit available. These are two sides of the same coin, representing the debt to credit ratio:
- Account balance is the amount you owe on your line of credit. This amount will increase with each transaction.
- Credit available represents the total amount of credit remaining available to you as part of the total allocated credit.
For example, let’s say you have a credit card with a total limit of $10,000. If you have $2,000 in purchases charged, your account balance would be $2,000 and your available credit would be $8,000. It is also important to realize that credit cards also have current and available balances based on pending transactions.
Factors Affecting Account Balance
Ultimately, the factors affecting account balance depend on the type of account and its purpose. For example, a checking account balance will frequently fluctuate up and down with each direct deposit and purchase. Conversely, your 401(k) balance should only go up more and more over time, even with small fluctuations from day to day. Here’s a look at some of the main drivers of balance shifts:
- New and pending debits and credits
- New contributions or withdrawals
- Performance of assets over time (invested accounts)
- Automatic invoices and subscriptions (cash accounts)
How often should you check your account balance?
Consider the type of account, then consider the function of this account. This will determine how often (or rarely) you should check it. Here are some examples for different types of accounts and their balances:
- Review current account balances subject to frequent daily transactions.
- Plan contributions to savings accounts and check when filing.
- To verify retirement accounts monthly or quarterly to assess performance.
- Day traders need to keep an eye on brokerage accounts constantly while trading.
- Swing traders should check balances daily when tracking a position.
- General investors should check the balances weekly or monthly.
- Long term investors should review the balances quarterly or annually.
Generally, the more frequently you use an account, the more frequently you should check the balance. The logic behind this is simple: money is more relevant in the moment, so it’s worth keeping a closer eye on it. That’s not to say you shouldn’t worry about other accounts, but rather, check them when it becomes relevant to do so.
Understanding Net Debt
What happens if you open your account at a negative number? In invested accounts, this usually means that you misused derivatives (forwards, futures, options, etc.). In cash accounts, this is the equivalent of an overdraft. However, this means that you have taken on net debt.
Net debt means there is insufficient funds to cover transactions. In most cases, the financial institution that holds the account now assumes this debt on your behalf (if the transaction was completed). That’s why banks charge overdraft fees, to cover the cost of holding your debt. You will need to deposit the difference in funds to restore a zero minimum balance and to cover any fees incurred.
Many financial institutions also offer “overdraft protection” or negative balance guarantees that prevent transactions from sending the account balance below zero.
An important tool for understanding wealth
What is an account balance? On the surface, it represents the funds available to you. But it is also a representation of cash flow and account performance. While you can check it daily or every few days, it’s also important to look at your balance over time. If there is more red than green, it signals a personal cash flow problem. If it is a number that keeps growing, it is a sign of a positive performance of the account.
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From checking and savings accounts to brokerage and retirement accounts, everyone has a balance. Familiarize yourself with it and pay attention to it. Always make sure this is a number that shows positive performance and growth over time.