We all know that the best way to a bigger bank account and less debt is to set up a budget or savings plan. How you save your money will depend on your spending habits, but one thing is for sure – you need a savings account.
You can either have a savings account connected to your checking account or you can open multiple savings accounts and have them set up for each goal you have. Financial experts don’t agree on which is best and there are pros and cons to each strategy. However, the first thing to do is to determine your spending habits and calculate if you’ll be saving enough money to justify multiple accounts.
Questions To Ask Yourself
- Have you budgeted for a savings account?
If you haven’t, you should start as soon as possible. When a family doesn’t have any savings, any emergency or unexpected expense can cause serious harm to your financial security. This is how cash advance programs wreak havoc on a family’s finances.
While it may be difficult to save much working full-time at minimum wage, financial independence is a long-term journey. A few hundred dollars this year, a thousand next, and so on, can really help you down the line.
Analyze your spending carefully and see where you can start cutting expenses so that you can add even more to your savings.
- Should you set up an automatic transfer from your checking to savings account?
If you set up your checking account to automatically transfer a set amount of money from every paycheck into a savings account, you don’t have to worry about making the decision yourself. By virtue of not seeing the money, you won’t spend it. And once it is already in your savings account, the additional step to transfer it back may deter you.
Furthermore, you can take this one step further and set up a direct deposit into your investment account. Most Americans don’t have access to a traditional wealth manager and therefore can really benefit from a robo-advisor. Robo-advisors such as Betterment and Wealthfront offer an automated service to help you allocate and diversify your investments. Because of the lack of human involvement, their fees are substantially lower than other financial advisors.
If this seems appealing, you may want to consider Betterment’s SmartDeposits program, which allows investors to automatically deposit funds into their investment account once their bank account crosses a certain threshold. This feature may be a tipping point for a Wealthfront vs Betterment comparison.
- Do you use your savings account to pay for non-emergency expenses?
If you habitually hit up your current savings account, then it might be in your best interest to put your money in a CD to limit your access. Most CDs will charge you a fee for early withdrawal.
Reasons to Have Multiple Savings Accounts
It’s easy to open up a savings account, but is it worth it? Here are some reasons that you might decide to do so:
- You are saving for more than one purchase. Perhaps you’re saving up for a car, a vacation and an emergency fund. If you have the three goals set up in three different savings accounts, it can be easier to track your progress for each.
- You have a lot of money in each account. If one account balance exceeds the FDIC-insured amount of $250,000, it makes sense to open another.
- You are fearful of your bank’s solvency. Even though your Federal Deposit Insurance will cover you should your bank fail, you won’t get your money right away. Keeping funds in different banks altogether means you’ll always have access to some of your money.
- You can take advantage of other banks’ perks. Banks often offer some sort of incentive for opening up an account with them. By opening up accounts at various banks, you increase the perks available to you. For example, JP Morgan Chase and Motif Investing have partnered up to offer retailer investors access to IPOs.
- You can shop around. Banks have relationships with different credit card companies, so if there is a travel or rewards card you want access to, a second or third bank account may be required.
This also comes in handy when applying for a mortgage since banks offer preferential rates to customers they already have relationships with.
Reasons Not To Have Multiple Savings Accounts
You may not feel the need to take advantage of having multiple savings accounts, and if you’re unsure, here are some reasons you should keep your money in one account.
- You may not be able to keep the minimum balance requirements. Some banks have specific requirements for opening up savings accounts, including a set amount the account must be opened with and keeping a minimum balance. Always try to find a way to avoid the monthly fee.
- More leverage with one bank. Banks need customer deposits; after all, whose money do you think they are lending out? For this reason, if you have a substantial amount with one branch, especially with a community bank, you may have some leverage when it comes to getting lower interest rates on loans or higher interest rates on deposits.
- Loss of interest. Some banks pay you interest on a tiered scale, and by spreading your funds across many accounts, you may be earning less.
- It could get confusing. You have to be pretty diligent with your finances to be able to juggle and balance several different accounts at various institutions. You have to decide which account gets how much and for what reason, and if you only have one account at one institution, it’s easier to keep track of the funds.
The Bottom Line
A highly efficient and organized person could find having multiple bank savings accounts to be exactly what they need to achieve their personal savings goals. Think about the reasons for and against spreading your money around and make sure you take into account interest rates, fees and perks before deciding.
Author Bio: John Schmoll and Gary Dek are former finance professionals who are committed to helping investors make wise investment decisions.