DEFINITION of 'Account Minimum'

Account minimum is the minimum balance required to maintain an investment account or bank account. An account minimum for an investment account may be established to ensure that a client has sufficient capital to execute a trade. A bank may establish an account minimum either for the customer to receive a waiver of account servicing fees or merely to keep the account open. In general, as there is usually no charge to open a client account, financial institutions set account minimums to ensure that their systems are not clogged with thousands upon thousands of dormant accounts containing very little money, since there is a substantial cost involved in administering such accounts.

BREAKING DOWN 'Account Minimum'

There is an obvious opportunity cost involved in maintaining an account minimum, as these funds could be deployed more profitably elsewhere. The higher the account minimum, the greater the opportunity cost. But in cases where the minimum thresholds are not very high, the resultant benefit such as a fee waiver may make it worthwhile to maintain the account minimum.

How Account Minimums Work

For example, assume your bank has a minimum monthly balance requirement of $2,000 in order to waive its monthly fees of $10 for falling below that amount. Investing in a one-year certificate of deposit will enable you to earn 1.5% interest. Should you maintain the minimum balance or invest in the CD?

Here's the comparison: The bank fees would be $120 annually, while the interest received from the CD would only be $30; even this paltry amount of interest would likely be taxed. Clearly, in this case, maintaining the minimum balance and getting the fee waiver is a no-brainer.

But what if the bank's monthly fees were only $5, and you were reasonably confident of obtaining a 10% annual rate of return by investing in a blue-chip utility? In this case, the annual fees of $60 are outweighed by the potential returns of $200, so it makes sense to pay the monthly fees and invest the funds that would be locked up to maintain the account minimum.

Investment accounts generally do not have monthly fees; most of them also only specify a minimum initial level of funding rather than a minimum monthly balance. However, active traders usually retain a certain level of funds in their trading account so as to act quickly when a trading opportunity arises. This liquidity can be valuable for investors, particularly ones looking to make tactical investments.

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