How Many Bank Accounts Should I Have?

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Some people might think you’re bonkers if you suggest they should have multiple bank accounts. That’s because until relatively recently, individuals only had one or two bank accounts. 

These days, financially savvy people have three or more. If you’re living paycheck-to-paycheck, having more than one savings account can help break this vicious cycle because this strategy can help you hang on to your hard-earned money. 

Keeping cash in separate bank accounts prevents you from spending money set aside for a specific purpose. That way, the monetary assets you earmark for a vet emergency won’t be accidentally frittered away because they co-mingled with your grocery funds. 

Multiple accounts also provide you with alternative sources of cash if you lose your debit card or one of your banks is plagued with technical difficulties. If you’re an entrepreneur, you’ll need a separate bank account for all your business transactions so you can keep your personal life and your company operations separate.

Having separate accounts for each family member cuts down on arguments about money while giving each person a degree of financial autonomy. Spouses could have a joint account for paying bills and separate accounts for each partner’s discretionary spending. 

Having multiple bank accounts is also advised if you have a lot of money because the FDIC only insures each one for up to $250,000 per account holder for each account category. If you have more than $250,000, consider opening a second account to protect your money if your bank fails. 

The problems with multiple accounts 

While there are some excellent reasons for maintaining multiple accounts, many financial institutions have minimum balance requirements and charge a monthly fee if the balance falls below that amount. 

Multiple bank accounts are also more challenging to keep track of. You’ll need to check your balances frequently to prevent fraudulent transactions and ensure you’re withdrawing funds from the correct account. 

How to set aside cash for financial goals 

An excellent habit to get into is to use savings accounts to set aside money for short- and long-term financial goals. There are no hard and fast rules about how many savings accounts you should have. However, to help you make your decision, first determine your financial objectives.

You might want to set up a single savings account for each goal. It’s better to use savings accounts instead of checking accounts because, with savings accounts, there are strict limits on how often you can take money out.

This helps cut down on the impulsive spending that can obliterate your budget and destroy your financial dreams. Besides, savings accounts accrue interest, and most checking accounts don’t.

Ensuring that each of your accounts is dedicated to a specific purpose helps you stay on track with your goals. It would be tragic if you were saving up for a hiking trip to New Zealand’s South Island, only to find out that the money set aside for this trip inexplicably disappeared because you put it in the same account as your grocery fund. 

It’s also wise to set up an emergency fund first. This is cash for unexpected things such as a job loss, hospital visits, or car repairs. It’s particularly important to keep your emergency funds separate. If they’re mixed in with your other money, you could find yourself in a dicey situation when a crisis rears its ugly head.

You might want to designate a savings account for charitable contributions and another one to save up for your dream home. If having multiple accounts becomes unwieldy over time, try consolidating some of them. 

Your everyday spending account 

Your checking account can be your everyday spending account because it gives you the fastest and most convenient access to your cash. Unlike savings accounts, checking accounts let you make unlimited transactions. 

Use your checking account to pay bills, make purchases, and manage daily financial transactions. You can open one up at a brick-and-mortar bank, a credit union, or an online-only bank. 

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What other accounts should I have? 

Certificates of deposit (CDs)

You should put some money into long-term savings vehicles such as certificates of deposit (CDs). CDs have higher interest rates than savings accounts. For example, let’s say you have $15,000 you want to squirrel away for 18 months. 

If you put that money in a regular savings account paying 1.5% interest yearly, you’ll earn $225. However, if you stash that cash into a CD paying 2.75% interest, you’ll make $412.50. 

The problem with a CD is you’re required to lock your money away for a predetermined period. If you want to withdraw your cash before this term ends, you’ll incur a potentially hefty penalty. If you know you won’t be needing the money anytime soon, a CD is an excellent place to put it. 

Money market accounts

A money market account is a sort of hybrid checking and savings account with higher interest rates than checking accounts but lower than CDs. 

Unlike a CD, you can withdraw money from your money market account whenever you want, either by using an ATM or writing a check. However, there are usually monthly withdrawal limits (six or less, typically). Money market accounts have higher minimum balance requirements — sometimes as high as $5,000 or more. 

You can easily transfer money from a money market account to a checking or savings account. These accounts offer a high degree of liquidity. This means they’re good if you have money you want to sock away but still want to be able to dip into in a dire emergency. 

Retirement accounts

401(k)s

A 401(k) is an employer-sponsored retirement plan that gives you a tax break on any money you put in it. What’s fantastic about this type of account is that cash is automatically deducted from your paycheck, so you can sit back and watch your money grow. 

The cash is invested into funds you choose ahead of time. Often, your employer will match your contributions. Contributing to your 401(K) lowers your taxable income, which means less money for the IRS. 

If you leave your job, you can take your 401(k) with you and roll it over into an IRA. While you can withdraw from this account before reaching retirement age, you’ll be penalized and need to pay income tax on it. 

Individual retirement accounts (IRAs)

If your employer doesn’t offer a 401(k), consider setting up an individual retirement account (IRA), which is also a tax-deferred account that helps you save money for retirement. IRAs offer a wide array of investment options, such as stocks, bonds, or other assets. 

You can set one up at most banks. There are four popular types of IRAs—traditional, Roth, SEP, and SIMPLE. However, keep in mind that you’ll need to keep the money in your account until you reach retirement age. Otherwise, you could face a 10% penalty and hefty taxes. 

403(b)s or 457(b)s

A 403(b), otherwise known as a tax-sheltered annuity plan, is the nonprofit equivalent of a 401(k). Consider starting one if you work for a tax-exempt organization, such as a church or a public school.

However, your employer must offer the plan for you to be eligible. You can contribute part of your salary to the account, and your employer may also make contributions. While you can make penalty-free withdrawals at age 59½, you must begin taking required minimum distributions by age 72.

Money deducted from your paycheck is tax-free, and contributions lower your tax bill. However, you’ll pay taxes on the money you withdraw at retirement age. 

A 457(b) is the tax-deferred annuity plan for state and local government employees, including firefighters, police officers, and other civil servants. Mutual funds and annuities are usually the investment options for 403(b)s and 457(b)s. 

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