Bank Account: Are we using bank account effectively? – Part-1

Continuing on the comments which I received for the calculations I covered on my previous post IPO-Should you invest in IPO, I really feel happy that the readers have now started to look at the fine prints of the calculations. Many of you have asked the question that saving bank accounts hardly pay 3.5% to 4% interest while I’ve taken 5.5% in my calculations. Then, the second question was that IPO process and refund takes only 3 weeks and not 2 months. These are valid questions and I feel happy that we are now getting into looking at the nitty-gritty details of finance.
However, still I feel that people are not reading and grasping effectively. Let me explain the fine details further.

In my previous post, I’ve mentioned the following:
The entire process starting from IPO subscription application to getting the refund takes around 2 months. Even if it takes 1 month, the mechanism by the banks to calculate interest ensures that you loose the interest for 2 months.

Then, I’ve also mentioned the mechanism banks use to calculate interest:
For people who don’t know, the banks pay interest only on the MINIMUM amount of money in your bank account, between the 10th and last day of the month. For e.g., if I have 2 Rs. in my bank account of 10 July, and I deposit another 1 Lakh on 11 July, I will get interest only on 2 Rs. because the minimum amount that I had between 10th and last day was only 2 Rs.

One of the readers has left the comment that it takes only a maximum of 3 weeks time to get the refund. It may be true, but my experience is that it takes a minimum of 1 month. Let’s look at an example: Suppose there is an IPO that opens on 15th July. You apply for the IPO on 15th July by taking the money out of your bank account. Even if it takes 3 weeks, it will be 6th August till you get your cheque; maybe later because of postal delays. Deposit it for clearing, it will be another 3 days to clear the cheque. Then, if there is a weekend in between, the money gets credited to your account only on Monday. This ensures that the money comes to your account only on 11th August or later. So ultimately, you will have to loose the interest for 2 months – July as well as August. Remember, we are talking about the fastest IPO process of just 3 weeks. In practical sense, no IPO gives refund before a month. Even the ECS system takes a month for refund. So ultimately, you loose the interest on your money for 2 months.

Second point: regarding the 5.5% interest rate. How much do you play around with your money? When you invest for an IPO, do you apply with all the money you have and don’t keep anything in your bank account? I’m sure, your answer would be NO.

This brings us to a fundamental question: Are we using our bank accounts effectively? Are we keeping enough money for emergency requirements in our bank accounts?

Personally, what I do is as follows: I keep a minimum of 25,000 Rs. in my savings bank account at any given point of time, like an emergency fund. May be I will need the money for an emergency reason, like hospitalization of a family member, or similar such unfortunate situations. I know smart-alecs will suggest having a credit card with 1 Lakh limit, but not all hospitals and emergency situations can be tackled by swiping a credit card. Moreover, establishments may charge 2-3% extra on credit card usage, which is not very good. If the establishment does not charge anything for credit card, then I will happily swipe my card. But there is definitely a necessity to keep an emergency fund in your savings account.

Any money above this 25,000, I ensure that it gets converted to a Fixed Deposit. The advantages of Fixed Deposits compared to a savings account are as follows:
• You don’t have to worry about the minimum amount between 10th and last date of the month. An FD gives you fixed interest for a fixed period, irrespective of the date it was issued.
• FD earns higher interest as compared to a savings bank account. The 5.5% rate that I mentioned was for FD.

Continue to Part II of this article: