Bank Account: Are we using bank account effectively? – Part-2

This is part 2 of the article Bank Account: Are we using bank account effectively? . In case you've not read the first part, please read it before preceeding with this one.

Every individual keeps (and must keep) an emergency fund in his savings bank account (like 25K I have). If you don’t keep an emergency fund, then you are making a very big mistake.
Many of the readers claim that they play around in the stock market with the money that they don’t need. Obviously, that will imply that you are investing in IPO the money that is over and above the emergency fund money. For e.g., if I have 75K in my bank account, I will invest maximum 50K for IPO and leave my 25K as emergency money. And if you have this extra money lying in your bank account, it will be foolish if you do not convert it to FD, given the higher amount of interest it will earn, as compared to a savings account.

Numerous types of accounts are available with the banks –especially private banks. We don’t take the opportunity to explore them.

I saw this punch-line in one of the commercial advertisements: “The better a thing works, the more we tend to take it for granted”. For the finance world, it can be modified as follows: “The simpler and risk-free a product is, the more we tend to take it for granted”.
That’s how we treat our bank accounts – we ignore them completely.
Similar thing goes for the IPOs. The so called good company IPOs appear to be risk free – which may be true, but what we forget is that there is a cost attached to application of IPO, as explained in my previous post.

For e.g., I have an account with a private bank. It comes with a so called “Easy Fixed Deposit”. Which means: I declare that I will maintain a minimum 25 K as my balance in the account. If the balance is more than 25K, anything above 25 K will automatically get converted to an FD in multiples of 5K. So If I have 28K in my bank account on 30th July and I get my salary on 31st July as 30K, taking the total to 58K, then this extra money above 25K, which is 58-25 = 33K, rounded to multiple of 5K, meaning 30 K will automatically get converted to FD and earn higher rate of interest. My total bank balance will still show 58K, but divided across 2 accounts: 28K in savings and 30K in FD.
Now suppose I need to withdraw 55K on 30th August. So my FD will be broken automatically, and I will receive interest for 1 month, which will be 5%, instead of 3.5% offered on savings account. Another benefit is that though the FD is breaking 1 day before the last day of the month (31st Aug), I will still receive the high FD interest for every single day. In case of savings account, I would have lost the interest on my withdrawal amount of 55k. The major benefit comes with the power of compounding, incase of FDs.

Now don’t jump on and start looking for opening an account with the private bank that offers this facility – a new bank account will come at a cost. First enquire with your bank if it has this scheme – I’m sure they should. If they don’t, then go for the manual way. Every reader of this blog has access to internet. I’m sure each of you will have internet banking as well. Almost all banks now offer FD request through internet banking. Try that, and make sure you utilize the money in your bank account effectively. Sometimes, simpler things work better than we assume :- )

Another thing that I want to clarify is that I’m not against IPOs. IPOs are good, and you can really make money out of it. The only thing that I want to highlight in my past article was that there is a major factor called LUCK and probability that determines whether you will be allotted shares or not. Do a self assessment, if you have applied for numerous IPOs in the past, were you allotted shares of all of them? Take the complete calculation for each of the IPO that you applied for, and you will see that the profit you made in one IPO was marginally better than the cost that you paid by loosing the interest on an unsuccessful IPO application.

I also mentioned that IPO applications should be made for long term that too for the businesses that you believe will be good. It’s completely subjective and left to the investor. Let me repeat once again: My articles are for telling everything about a product and the cost attached to it – You have to decide whether to take a chance or not :- )

Keep visiting this blog for further content.
Please read the comments and post your views and queries in the comments section which helps in open discussion and avoid duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.