Photo: Daniel Goodman / Business Insider
Over the past year, I’ve been simplifying my finances. I’ve collected a number of savings accounts and checking accounts, mostly as a way of auditioning and reviewing various banks for the benefit of Consumerism Commentary readers. There’s little sense in me holding onto so many accounts across dozens of banks, so I’ve been taking some time to close accounts.I would think there is no one who needs 40 high-yield savings accounts. There is no good reason to want that level of complication in a personal finance portfolio. If you have savings accounts across three banks, you probably have more than you need.
There are two major reasons for keeping funds in a savings account:
- Money to cover expenses you would have in an emergency (such as abrupt loss of income) should be kept in a savings account. Consider this a part of the emergency fund or plan.
- Money you’re planning to use within one year for a large purchase should be in a high-yield savings account, earning as much interest as possible while still bearing no risk and the ability to withdraw your funds whenever you’re ready.
There’s no reason for the money for both purposes to be kept in separate accounts or banks. Some people, and until recently I was one, like to separate their savings accounts into separate accounts or sub-accounts at the same bank. ING Direct makes this easy and simple. At a glance, you can see the balances in accounts you might designate according to their purpose. At one point, my collection of sub-accounts was varied:
- Emergency Fund
- New Car Fund (which became the Car Expense Fund after buying the new car in 2004)
- Vacation Fund (which is emptied for vacation and replenished afterward)
- House Fund (which has yet to serve its purpose)
This method of account designation can keep your financial picture clear every time you check your balances online, visit Mint.com, or open Quicken on your computer. If you have a tendency to be obsessive, it can get out of control. You can achieve the same goal of organisation by maintaining just one account while keeping a spreadsheet that tracks the specific goals, limiting yourself to only one bank account number to remember.
Having one account keeps your interactions with financial companies as simple as possible, and that’s a great benefit.
If, however, you have a tendency to be tempted to dip into your emergency fund for spending, abide by a different strategy. Your emergency fund should be out of reach through ordinary means. Particularly if you’re in the beginning stages of establishing an emergency fund, it can be easy to withdraw money for spending, rationalizing the choice by thinking you’d just start again next month.
That can be a dangerous trap for building long-term financial security, so tempted individuals should just put the emergency fund in a different bank, set up a recurring deposit from a paycheck, and lock up the account information so you can’t access it. Use a password for online access you’ll never remember such as a random string of 16 letters, numbers, and special characters. Check your statements each month to ensure there’s no funny business happening with the bank account, but the further removed you are from access, the more likely the emergency fund will be available to serve its purpose when you need it.
With the above strategy, you would have at minimum two savings accounts — one mostly out of the way, reserved for emergencies, and one for everyday saving. There is another reason you might want to have two savings accounts. This pertains to how quickly you can access cash when you need it.
If the best interest rates are in high yield online savings accounts, you may want to keep the bulk of your savings in one. You should, however, have some cash available at a local bank branch. It can take two days or more for you to receive a withdrawal from an online savings account. Some offer ATM access to make this process quicker, but ATM withdrawals are often limited by size. If you need $2,000 in a hurry — for whatever reason — you’re probably not going to be able to withdraw this amount from your online savings account. Having part of your savings in a local bank ranch allows you to make any size withdrawals, at almost any time, in a convenient location.
The easiest cash to access — something you can grab in a real emergency without visiting a bank or waiting for an online transfer — is cash you keep in your house. Keeping too much cash in your house can be risky. Maybe you have a safe bolted into your house’s foundation, but it still presents a risk. Most people would be more likely to hide cash in a location around the house. You may think you’re clever by hiding cash in an old coffee can at the top of your pantry rather than underneath your mattress, but if you’re a target for robbery, sophisticated criminals know where to look.
Nevertheless, in a weather emergency, you might find that banks are not open and ATM networks are down. The only money you’ll have in that situation is what you have on you. I’d like to think that ATM networks are not down for long periods of time and that hopefully the banking system would be operational before your cash runs out, but it will certainly depend on the situation. What would you be able to do if you found yourself stuck in a Hurricane Katrina-like situation?
You should have two savings accounts for the above reasons. You can certainly survive almost 100 per cent of the time with just one, but you might face some inconveniences — either a lower interest rate or slower access to the cash. Families could even survive without a savings account. A checking account still provides access to money on demand, and in some cases, provides higher interest rates. Some families go through their lives without any mainstream banking products, choosing instead to take advantage of expensive products like check cashing services and payday loans. Some people get paid in cash and never need to visit any financial institution, mainstream or otherwise.
It’s not a healthy way to manage your money for the long-term, but people can certainly live. It would be ideal to have two savings accounts, but it would be tough for me to say there is a certain number of bank accounts necessary in order to live. Figure out what’s best for you. Perhaps having two savings accounts can be a goal — either to cut down your complex portfolio or to give yourself financial footing. There is a difference between what is ideal and what is necessary.