When logging 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? It’s something we’re all familiar with, it also offers hidden insights worth exploring beyond the current figure displayed as the balance. 

On the surface, the account balance is the total amount of money present in that account—the sum of all debit and credit transactions. It’s a changing figure that goes higher and lower depending on transactions. This makes it an indicator of your personal cash flow. And, even beyond that, it’s a representation of your purchasing power—or your total net debt. Needless to say, it’s a figure worth paying attention to, regardless of the account. 

What is an account balance?

Current vs. Available Balance

Many people get confused when they log into an account and see two numbers: current balance and available balance. While these might imply the same thing or even reflect the same number, they’re actually different

  • Current balance is the balance of the account that includes all money in the account and held funds pending transaction.
  • Available balance represents only the money in your account that’s available to you outside of pending transactions.

For example, you might open your account to see a current balance of $1,000 and an available balance of $800. If you investigate further, there’s likely $200 in pending transactions. As a result, the current balance accounts for that, while your available balance looks ahead to how much you’ll have left. 

Account Balance vs. Available Credit

When it comes to credit cards, there’s also available credit to consider. These accounts typically show two figures as well: account balance and available credit. These are two sides of the same coin, representing debt-to-credit ratio:

  • Account balance is how much you owe against your line of credit. This amount will increase with each transaction.
  • Available credit represents the total outstanding credit amount available to you as a portion of total allotted credit.

For example, 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’s 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 account type and its purpose. For example, a checking account’s balance will fluctuate up and down frequently, with each direct deposit and purchase. Conversely, your 401(k) balance should only go higher and higher over time, even with small fluctuations day by day. Here’s a look at some of the primary drivers of balance changes:

  • New and pending debits and credits
  • New contributions or withdrawals
  • Asset performance over time (invested accounts)
  • Bills and automatic subscriptions (cash accounts)

How Often Should You Check Account Balance?

Consider the type of account, then consider the function of that account. This will determine how frequently (or infrequently) you should check it. Here are a few examples for different types of accounts and their balances:

  • Review checking account balances subject to frequent transactions daily.
  • Schedule contributions to savings accounts and check when depositing.
  • Check retirement accounts monthly or quarterly to gauge performance.
  • Day traders need to keep tabs on brokerage accounts constantly while trading.
  • Swing traders should check balances daily when tracking a position.
  • General investors should check balances weekly or monthly.
  • Long-term investors should review balances quarterly or annually.

As a general rule of thumb, the more frequently you utilize an account, the more frequently you should check the balance. The logic behind this is simple: money is more relevant in the moment, therefore worth keeping a closer eye on. This isn’t to say you shouldn’t care about other accounts—rather, check them when it becomes relevant to do so. 

Understanding Net Debt

What happens if you open up your account to a negative number? In invested accounts, this typically means you’ve run awry of derivatives (forwards, futures, options, etc.). In cash accounts, it’s the equivalent of an overdraft. Nevertheless, it means you’ve incurred a net debt. 

Net debt means there are insufficient funds to cover transactions. In most cases, the financial institution that holds the account now bears that debt on your behalf (if the transaction went through). This is why banks charge an overdraft fee, to cover the expense of holding your debt. You’ll need to deposit the difference in funds to restore a minimum zero balance, and to cover any incurred costs. 

Many financial institutions also offer “overdraft protection” or negative balance safeguards 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 accessible to you. But it’s also a representation of cash flow and account performance. While you might check it every day or every few days, it’s also important to look at your balance over time. If there’s more red than green, it signals a problem with personal cash flow. If it’s a figure that keeps growing, it’s a sign of positive account performance. 

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From checking and savings accounts to brokerage and retirement accounts, each has a balance. Get yourself familiar with it and pay attention to it. Always make sure it’s a figure that exhibits positive performance and growth over time.