The best way to ensure that you build wealth and avoid debt is to diligently plan and save as much money as possible for both future needs and desires. However, exactly how you handle your savings can depend greatly upon your financial habits. Some financial experts recommend setting up a simple savings account tied to your checking account, while others advocate opening multiple accounts to be used for various savings targets.
Many people love to have multiple bank accounts owing to one reason or another. This may be a good idea in some cases, like if you are a businessman and your transactions are huge. However, for a salaried person or a normal human being, having multiple bank accounts hardly makes sense – particularly in the wake of growing bank transaction and maintenance charges as well as keeping in view the ineffective use of cash and hosts of other issues.
Here we are taking a look at some important reasons why you need to consolidate or eliminate your old or surplus bank accounts:
Most savings accounts require you to maintain a minimum monthly balance. This could be as high as Rs 25,000 for some banks in urban areas, while for others, this is usually in the range of Rs 5,000-Rs 10,000. Thus, the more accounts you have, the more cash you need to maintain in them as minimum balance. For instance, if you have five bank accounts, then you will be required to maintain at least Rs 25,000 as minimum balance, unless those are zero balance accounts. However, remember that even your zero-balance salary accounts automatically get converted into regular savings accounts once you change your job and create a new salary account. Then these accounts will need the minimum average balance maintenance.
Beware Of Charges
Most savings accounts are not free. Therefore, you have to pay minimal charges towards services such as debit cards, SMS alerts, ATM use etc. In fact, service charges for non-maintenance of monthly average balance alone can go up to Rs 600 in some cases. Therefore, the more accounts you have, the more fees you have to pay from time to time. Moreover, if you have any irregularity in the account, then it also affects your relationship with the respective banks, which in turn may affect your credit score also.
Ineffective Use Of Cash
Having to maintain minimum balance in several accounts means that you lose the opportunity to lock the same cash in more lucrative investment instruments such as FDs, mutual funds, etc. This means your money will keep on generating lower returns, which may be as low as 3-4 per cent in a majority of cases.
Keep It Simple
“Most people will be well served with one checking account and one savings account. The value of simplicity can’t be overstated,” says Julie Ford, a CPA and certified financial planner at Ford Financial Solutions, LLC. “I prefer online banks like Capital One 360, which tend to have no fees and offer high-interest checking and savings.”
Brannon Lambert, a CFP at Canvasback Wealth Management, LLC agrees.
“I’m a fan of keeping things as simple as possible, regardless of the situation. Little benefit is gained by making things more complicated to manage,” he says. “You want a checking account for monthly expenditures and a money market account to hold your savings. You don’t want to keep your extra money in the checking account because it makes it too easy to spend. You may utilize a third account if you want to segregate funds for a specific purpose like a down payment on a home or large purchase.”
Reasons You May Not Want Multiple Bank Accounts
There are several reasons you may want to keep your savings in one place rather than in multiple accounts:
It Can Be Hard to Reach Minimum Balance Requirements. Many savings accounts require you to open an account with $2,000 or more or require you to maintain a minimum balance in order to earn interest.
Building Banking Relationships Can Be More Difficult. Even if you choose to have multiple bank accounts, it may pay to keep them with one financial institution, as some banks provide lower interest rates on loans or reduce fees for customers with multiple accounts.
You Could Lose Interest. While the interest paid on most savings accounts is pretty low, some accounts pay a higher interest rate on a larger balance. Spreading your funds into many accounts may keep you from earning the highest rate.
You May Find It Confusing. If you have $500 allotted to save each month or you receive an unexpected bonus or gift, you’ll have to decide whether to put it all toward one goal or to split it between various accounts. If you have only one account, you won’t have to decide immediately how to appropriate the money.
Multiple Accounts Can Complicate Automatic Transfers. If you choose to have money transferred from each paycheck, it may be too much to keep track of if you are having cash transferred to a variety of accounts.
You May Lose Some Money. If you are less-than-perfect at keeping track of your finances, you may be better off with one account – or at least with keeping all your accounts with one financial institution so you don’t forget what you have and where it is.
You Could Pay Higher Fees. Some financial institutions charge fees for their accounts, especially on accounts with a low balance. Make sure you’re not overpaying by dividing your savings.
If you are supremely organized and want to keep your funds for various needs and desires separate from each other, you may be a good candidate to open multiple savings accounts. However, be sure you aren’t missing out on the perks of having a high balance with one financial institution or having fees eliminated because you have multiple accounts with one bank or credit union. You should compare interest rates and fees on all accounts before you make your final decision. You should open a new account only if you have any specific reason for that. If you have an old bank account you’re rarely using, it’s time to close them. No need to maintain an account at your hometown if it’s not serving any purpose. Time to organize and simplify!