Common financial guidance often advocates that you should simplify your expenses, to make sure that you are easily able to track exactly how much money you have saved and where. And while it is really important that you know where all your money is, it can be prudent to have a few different savings accounts at any one time.
In fact, I currently have three of them.
Today, I’m back to show you why this can be advantageous and help you decide how many savings accounts may be right for you.
What is a savings account?
A savings account is a type of financial account that helps individuals, couples, and businesses to save money and earn interest at the same time. Oftentimes offered by banks and financial institutions, savings accounts come in a few different varieties, such as:
High yield savings
When you save money in a savings account, the bank or financial institution where you opened your account will hold the funds on your behalf and pay you interest. You’ll always want to make sure that your account deposits are protected by the United States Federal Deposit Insurance Corporation (FDIC), at least up to a certain level ($250,000 in many instances).
Pros of savings accounts
There are many pros to savings accounts, though they can vary by bank. Most include:
A secure place to store savings: Bank accounts in the United States are very safe, secure, and you'll be able to access your cash whenever you need it.
The ability to earn interest: Money that you stash under your mattress doesn't earn anything in the way of interest. And while traditional bank accounts don't really offer much in the way of yield, high-yield ones absolutely do. More to come in a minute.
Liquidity: Bank accounts are known as liquid, meaning that you can access your money quickly in the event that you need to. Plus, oftentimes, you'll be able to access your money in either cash or electronically, via a debit card.
Automatic transfers: In most cases, you'll be able to transfer money effortlessly among your accounts. Plenty of institutions and banks now offer this service for free, so I do not recommend that you ever pay for electronic fund transfers if you can avoid it. One way to get around these fees is to simply set up your direct deposit at work to automatically contribute to your accounts for you.
What type of savings accounts should you use?
Contrary to what you've heard, there are differences between many of the savings accounts on the market. Today, I will focus on three in particular:
Traditional saving accounts are those accounts that you think about most often when you think about banking. They allow you to earn interest, though they likely will not offer check writing or unlimited monthly transactions. One key if you're looking for higher interest rates is to consider an online only bank with no brick-and-mortar locations. Oftentimes, these banks will lower financial overhead pay higher APYs.
You may also consider a checking account. Checking accounts are different from savings accounts, as they tend to have:
No monthly transaction limits
Lower (or zero) interest
Debit card services available
Since checking accounts tend to offer lower or zero interest rates, I struggle to recommend them, though they may be an option for those looking to prepare for their shortest-term goals.
High-yield savings can also be a great choice for those looking to maximize the interest that they are able to earn. These accounts allow you to take advantage of higher interest rates, though you may once again be subject to a monthly transaction limit and a lack of check writing services available to you.
In most all instances, though, your funds are protected by either FDIC or NCUA, if your funds are held at a credit union.
I mentioned earlier that I don't actually use traditional checking/savings accounts. The reason for this is because I use an individual account, which are traditionally offered by financial services institutions, rather than banks.
Mine, through Fidelity Investments, has all of the best features in one. For example, I'm currently earning a nearly 5% APY, on par with high-yield savings vehicles. Additionally, I am able to invest money for my future financial goals.
But the perks don't end there either. I'm not subject to any transaction limit in any month, and I have a linked debit card that reimburses me any ATM fees nationwide! Talk about a win-win!
Why I have multiple savings accounts
As I've alluded to, I have three different savings accounts across a couple of different institutions. And though this likely seems confusing, I do so for a number of different reasons.
1. I have different financial goals
Like most Americans, I have a number of different financial goals, some short term, like redoing flower beds in my yard, and others longer term, like building a vacation home. In my mind, at least, it does not make a ton of sense for me to have all of my money pooled together in one place to plan for these drastically different goals.
This way, I am better able to keep track of my progress. Plus, I tend to use individual brokerage accounts rather than checking accounts, which allows me to tailor any investment strategy to my risk tolerance and time horizon before I'll need the funds.
2. It helps me budget
Having my money spread across multiple savings accounts also makes it a lot easier for me to handle my monthly budgeting.
I already mentioned that I have accounts reserved for my short- and long-term financial goals, but the third account is actually for my present cash flow needs. I handle things like my car payment, mortgage, credit card bills, and utilities from this account.
Plus, since I receive my paycheck in this third account, I'm able to use it to help me budget and determine how much I can afford to save for my short- and long-term goals in any pay period.
3. It helps me mentally
Mentally, having separate and defined "buckets" of money is something that keeps me organized and prevents me from spending money I shouldn't be.
I know it sounds silly, since there is nothing that prevents me from just transferring money electronically among these accounts. But for me, the barrier of only having a set amount of money in my "spending" savings account is enough to prevent me from dipping into those funds earmarked for other purposes.
How many savings accounts can you have?
In most all instances, there is no limit on the number of savings accounts that you can have at any given time. Similarly, there is no limit on the number of banks that you can have open accounts with.
And while I do believe in having multiple accounts for things like asset protection and different financial goals, you do not want to complicate your financial situation too much, as doing so could make tax filing time more complicated, or worse, could lead you to losing track of one or more of your accounts.
Is it good to have more than one savings account?
Opening more than one bank account can be a good idea to help you to accomplish a few things in particular:
Find the best APY offers: In a high interest rate environment like the present, banks offer higher APY rates to attract new customers. You may be able to take advantage of this.
Bonus offers: It is also fairly common for banks to attract new customers with bonus cash offers. For instance, you may receive $200 if you move at least $5,000 into a new account. This can be free money for you!
Relationship building with multiple banks: Building familiarity with more than one bank may be advantageous for you in the future, particularly if you find yourself looking for a mortgage loan or other type of financing.
When is having multiple bank accounts bad?
Having multiple bank accounts is only bad in one of three scenarios:
First, if you end up paying transaction or monthly fees that could have been avoided with other banks or financial institutions.
Second, if your multiple accounts cause you confusion or to lose track of your finances.
Finally, if you find yourself neglecting any of your financial goals because you have money all over the place.
But if you don't find yourself falling victim to these three risks, you're good to go.
How many savings accounts should I have?
The number of savings accounts that you have is totally dependent on what works best for you. I've decided on three, at least over the past couple years, but you may opt for anywhere between one and five - or more - depending on how you set up your finances.
For example, some people may opt to open an account for each of the following:
Emergency fund savings
Preparing for vacations
Buying a car
Buying a home
At the end of the day, the right number of savings accounts for you is the number that works for you.
Having more than one savings account can be an excellent way to prepare for the future and balance your present cash flow with your short- and longer-term financial goals. The exact number of bank accounts that you decide to use depends on your personal preference, organizational style, and budgeting technique.
Now, it's your turn. Take to the comments below and share with me how many bank accounts you use!
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