Valuing a current account

Thanks.

I don't see how anyone other than you can value this. If your money coming in equals whatever goes out in a month then it's zero, unless you want to revalue yourself at different points in the month. It all depends on what you are trying to achieve.

Rob Graham

You decide what date you want your valuation to occur, and do that accross all your assets. For the bank, the value is simply:

What the Bank Statement says

LESS: payments (maybe cheques you've written) which have not yet appeared on the statement

PLUS: bankings (maybe a desk deposit that afternoon) which are not yet on the statement.

EQUALS cash at bank.

If you have bills to pay or money that is due to you those can be listed separately at Creditors and Debtors respectively - they are nothing to do with the bank.

'Personal net worth' can mean whatever you want it to mean, so just define it in a way that suits you, then you'll find it easy.

However, unless you're undergoing due diligence for someone who intends to buy you, I really don't see the point. Otherwise, you will need to use standard accounting conventions for similar transactions. What they are, though, I haven't the faintest idea.

If you don't want to employ an army of financial advisors, just guess. What difference will it make?

That's all true enough, but I don't think the OP is particularly interested in a "snapshot" valuation on an arbitrary date.

The thing one needs to bear in mind with a current account is that it generally acts as a buffer between incoming and outgoing funds, and typically an account holder would manage the account in such a way as to minimise the risk of the balance dropping below the level at which interest is charged (usually zero, but some accounts boast a small interest-free overdraft facility) or charged at a high rate (when an overdraft limit is exceeded), while at the same time not allowing the balance to creep up too high (if the credit interest rate is low) thus foregoing interest which could be earned elsewhere by syphoning excess funds off into savings where a better rate of interest is available.

Most people's accounts are probably fed by a single income stream, and as the OP rightly points out, multiple streams complicate the picture a little. But he is wrong, in the single stream case, to use the "balance just before the salary comes in" as the "worth" of the account. It should really be the average balance throughout the entire typical month, assuming that the average monthly inflows equal the outflows (if they don't, e.g. if the income streams exceed the monthly spend, he would at certain intervals syphon off excess funds to elsewhere, and the average would need to be adjusted to account for this).

It's easy to see why the average balance should be taken. Imagine standing watch over the account balance on a daily basis, and ensuring the account balance is zero at all times, by syphoning off any credit immediately after it is made, and re-stocking the account immediately prior to any debit hitting it, with just enough money to cover it.

The timing of all the inflows and outflows will determine the level of the average balance which is required in order to satisfy the constraint of not going overdrawn. This balance will be between zero and the sum of all inflows. Worst case is when the inflows all happen on one day and when the outflows all happen the day before. Best case is when all the in- and outflows happen on the same day.

If your account pays credit interest at a known rate, the easy way to work out the average monthly balance without actually working it out the hard way, is to divide the amount of interest paid in an average month by the (monthly) interest rate.

In message , Ronald Raygun writes

No, the best case is when the inflow is on day 1 and the outflow is on day 1+1month-1day.