Why 5 Bank Accounts Are Better Than 1


When trying to get your finances in order, simplicity would seem to be the best approach. But when it comes to bank accounts, most consumers might be better off with more than just one or two.

How many accounts should someone really have? According to Lisa Ray, financial education specialist with Consumer Credit Counseling Service of Atlanta, the average individual may want to consider having five separate accounts, each designated for different purposes.

The reason for the multiple accounts: keeping funds separate makes it easier to stay on track with budgets and plans.

"People need to separate their needs from their wants," says Ray. "Have one account for the things you need on a monthly basis, such as your food, utilities and mortgage, and another for your wants, such as eating out or going to a movie." As for the other three, Ray suggests setting up a third account for your emergency fund, a fourth account for your long-term savings or retirement, and a fifth account for your savings goals, such as a vacation or new flat-screen TV.

But how might someone fund these various pots of money? The easiest way to do it is to set up automatic transfers that will divert funds to the appropriate accounts the moment your paycheck is deposited. That way, money needed for your mortgage payments and utilities is safely protected in a separate account before you have a chance to spend it on a night out.

Meanwhile, separating your wants from your savings goals will help you achieve those goals faster. "If the two accounts are mingled, it's much easier to spend your money on the wrong things," says Ray. If they’re kept separate, you'll have to stop and think about whether that impulsive splurge will delay your vacation plans.

Ray recommends setting up a checking account that allows you to pay bills and write checks for your needs. A second checking account with an associated debit card would work for your wants. As for your other three accounts, shop around to find accounts with solid interest rates.

For instance, residents of North Carolina may want easier access to the money they are saving for specific goals, so they may choose a savings account, such as one from Bank of America (Stock Quote: BAC) at 0.2% interest.

For the long-term savings and emergency fund accounts, consider the higher interest rates available from money market accounts (MMAs) to help protect your money from the impact of inflation. Moreover, MMAs have withdrawal restrictions that may make it less tempting to use the funds for the wrong reasons. Residents of North Carolina can get a money market account earning 1.26% from Citizens South Bank (Stock Quote: CSBC) or 1.77% from Carolina Trust Bank (Stock Quote: CART).

Managing several different accounts might seem like a lot of work, but most of the extra effort is at the beginning, when you’re setting up the accounts. After that, it's mostly a question of monitoring balances to avoid overdrafts, and keeping your overall budget on track.


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