How Many Bank Accounts Should I Have?
If you’re investing, then you’re most likely allocating money into various places like stocks, mutual funds, and index funds.
In the same light, should you also have accounts from many different banks? Or does it make sense to centralize your personal accounts into one or two checking accounts and savings accounts?
This is a question that many consumers struggle with. To arrive at an answer, let’s start with a quick primer on how bank accounts work.
An Introduction to Bank Accounts
Putting your money into bank accounts is fundamentally different than investing in the stock market or real estate. When you put money into deposit accounts, you’re saving it and protecting it from market fluctuations.
While the stock market is volatile, your money is safe in a bank account, thanks to the Federal Deposit Insurance Corporation (FDIC), which insures your deposits up to $250,000 per account. If you have separate savings accounts or separate checking accounts at different banks, each account is insured up to that amount.
If the institution you’re banking with goes under, your money is protected. That’s a much different scenario than the stock market, where if a stock plummets, so too does your money.
Sure, you can earn some minimal interest on a checking account and a savings account. But you’ll also incur hefty opportunity costs, as your money could generate a greater rate of return elsewhere. It’s good to have money on hand for your regular expenses and also an emergency stash, but holding all your excess money in a savings account is not the path to financial freedom.
Common Types of Bank Accounts
A checking account is a type of flexible deposit account that lets you make as many withdrawals and deposits as you want to during a monthly billing cycle. Traditional checking accounts typically have low interest rates but are highly liquid and come with checking and debit card access. They’re usually used for routine expenses — like buying groceries and paying bills (e.g., rent and credit card bills).
If you’re married or in a relationship, you may want to consider a joint checking account, which both you and your special someone can use.
A savings account is a deposit account for short-term or long-term holding. For example, you may use a savings account to save money for a down payment on a house or to build a six-month emergency fund.
Savings accounts typically have higher interest rates than checking accounts to encourage saving. They are also bound by Regulation D, which is a federal law that restricts you to six withdrawals or transfers per month.
High-Yield vs. Traditional Accounts
Traditional banks are now facing rising competition from online-only banks that offer high-yield checking accounts and high-yield savings accounts.
For example, Ally Bank is a relatively new bank that offers a high-yield checking account with interest rates hovering between 0.10% and 0.25% APY (as of February 2021). They also offer a savings account with 0.50% APY.
American Express is another company that offers a high-yield savings account that delivers a 0.50% APY as of February 2021. Compare these numbers to Bank of America’s Advantage Relationship checking offering, which has interest rates between 0.01% APY and 0.02% APY, with a monthly fee of $25 unless you meet certain requirements. No thanks!
Compared to traditional banks, online banks typically offer higher interest rates because they have less overhead to worry about from brick-and-mortar competitors. This enables more money to flow to consumers, which adds up to better returns.
There are a couple of downsides to consider.
First, high-yield interest rates are variable and fluctuate depending on the state of the economy. When the Federal Reserve cuts interest rates, high-yield percentages tumble. While rates had been higher than 2% just a few years ago, they’ve taken a nosedive since.
Second, online banking means just that. You won’t be able to pop into any branches. In most cases, you’ll use an online banking account with a separate bank that has physical branches.
Money Market Account
A money market account is an interest-bearing account that serves as a hybrid between a checking and a savings account. Money market accounts typically have higher interest rates than regular savings accounts. Open a money market account, and you’ll also be able to write checks and use a debit card.
That said, money market accounts have more restrictions than checking accounts. They are commonly offered by online banks and credit unions.
Certificate of Deposit (CD)
A Certificate of Deposit (CD) is a type of savings account that locks your funds for a set period of time with a fixed interest rate the instrument matures. Depending on the term you choose, your CD might be locked for six months, a year, or five years, among other terms.
Bank Accounts vs. Brokerage Accounts
Many leading banks offer bank accounts and brokerage accounts for investing. The main difference between a bank account and a brokerage account is that a bank account only holds money while a brokerage account holds money as well as securities like stocks, bonds, and index funds.
How Many Bank Accounts Should I Have?
As you can see, there are many options to explore when it comes to bank accounts, making it hard to determine where to put your money.
The good news is there is no limit to how many bank accounts you can have. In the United States, consumers are allowed to have multiple accounts spread across different traditional banks, online banks, and credit unions.
The number of bank accounts that you have depends entirely on your personal situation, your preferences, and your financial goals. Some people prefer to keep it simple with one or two accounts while others find it more useful to spread their money around.
If you opt to use multiple bank accounts, keep a running spreadsheet so that you don’t lose track of where your money is being kept. This is especially important for tax and recordkeeping purposes.
It’s easy to fall behind and forget about an account only to discover it years down the road. This issue only compounds in proportion to the number of accounts you have.
Maximize Interest Rates
A growing number of investors are choosing to have both a traditional checking and savings account for daily spending along with a high-yield account they can move around strategically to maximize interest rates.
Keep an eye on interest rates and consider mobilizing a portion of your funding to generate higher returns as market conditions fluctuate.
Plan for Short-Term and Long-Term Growth
Since there is no limit to how many accounts you can have, you may benefit from diversifying your bank account holdings.
For example, suppose you have $20,000 in checking. You may choose to keep $5,000 on hand to cover daily expenses, put $10,000 into a high-yield savings account for flexible access and maximum growth, and put the remaining funds into a CD or a brokerage account.
Be Strategic About FDIC Limits
If you have a significant sum of money in checking and savings, you’ll want to be strategic about where you park your money to protect your assets.
For example, suppose you have $300,000 tucked away in savings, CDs, and checking. You’ll probably want to avoid putting all of that in one bank in case something happens to the institution. Otherwise, you could be on the hook for any funds in excess of $250,000.
Tips for Managing Bank Accounts
Keep a Budget
If you have many bank accounts, it can be easy to lose control over your funds. Keep a tight budget and track your various accounts so that you have a clear understanding of how money is moving in and out of each one.
Budgeting is necessary for reaching your savings goals and guiding your financial decisions. The vast majority of successful financial investors keep budgets to monitor their financial movements.
Watch out for Fees
Word to the wise: Watch out for bank account fees.
Oftentimes, banks charge high monthly maintenance fees unless you meet minimum deposit requirements. Unfortunately, with interest rates being so low and fees being so high, this could negate any interest you collect if you’re not careful.
When you sign up for a bank account, always read the fine print. Keep the details handy in a secure location for easy reference in case you need to challenge or dispute fees.
Be Skeptical about Perks
Banks often offer perks to consumers to encourage them to sign up for services like checking and savings accounts. For example, a bank may offer a $200 cash bonus for signing up.
Generally speaking, you should be very careful about signing up for a service based on a perk. Sign up for a service because you like the bank and their policies (e.g., better interest rates) — not because they dangle a marketing offer in front of you.
Perks can be helpful. But in the grand scheme of things, it’s all a marketing ploy, and you should treat them as such.
Frequently Asked Questions
Are online banks safe?
Online banks are safe as long as they contain standard security measures. For example, look for features like real-time monitoring and fraud detection, full encryption, and multi-factor authentication (MFA). You should also research to find out whether the company has a history of data breaches or security violations.
One thing to consider when working with an online bank is they may not have physical branch locations. So make sure the company at least has robust customer support (e.g., phone and live chat) to help just in case you encounter a problem.
Do you need a credit score to open a bank account?
Banks do not check your credit score when you apply for an account. So, if you have little to no credit history — or a history of credit problems and a low credit score — you should still be able to open an account.
Can you have multiple accounts from different banks?
There is no federal limit restricting how many bank accounts you can have. As a consumer in the United States, you are allowed to have as many checking and savings accounts as you wish. Hooray!
The number of accounts you end up with will depend entirely on your personal situation — including your total assets and your willingness to manage multiple accounts.
What’s the best way to avoid overdraft fees?
Overdraft fees occur when your spending exceeds your available funds. Overdraft fees tend to vary from bank to bank and cost an average of $30.
My long-time readers know what I think of fees. Let’s just say you should do your best to never have one show up in your account.
You can avoid overdraft fees is to keep a close eye on your spending. Whenever you write a paper check, make a note of it. Throw that note away once the check has been cashed. You should also sign up for alerts that let you know when your balance falls below a certain threshold.
The best way to avoid overdraft fees is to find a bank that lets you link your checking account to another account (e.g., your savings account) for automated overdraft protection. Further protection can be achieved by paying for items with cash or credit and avoiding your checking account altogether.
Are credit unions FDIC-insured?
The FDIC only insures deposits for banks. Credit unions — which are not-for-profit organizations — are insured by the National Credit Union Administration (NCUA).
Do all banks have minimum balance requirements?
Not all banks require you to have or maintain a minimum account balance. Be sure to check for minimum balance requirements before opening an account and putting any amount of money into one. It’s a good idea to shop around for banks don’t hit you with a fee if you don’t have enough money. Seems counterproductive, doesn’t it?
The Bottom Line
The number of bank accounts and investment accounts you have is your personal choice and you will not be penalized or prevented from having them. When managing different accounts, just remember to keep a close watch on your finances to track your spending and monitor for fraud.
At the end of the day, it really doesn’t matter how many bank accounts you have. The only thing that matters is that you have as many accounts as you can comfortably manage while you move further along your journey toward financial independence.
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