Effectively managing your money often requires more than just one bank account. Financially smart people use multiple bank accounts—and for very good reasons. Bank accounts can be used, as we shall see, to organize and make clear the several different aspects of your financial life. This is a life that has a past, a present, and a future; a life in which you hold a variety of different financial assets and/or owe a number of different liabilities; a life that has many different compartments and secret doors. Here are the seven kinds of bank accounts that can help you manage your financial life.
1. Primary Checking Account
Your main checking account is where your consistent income is deposited and daily expenses are paid. It ought to be a no-fee account that allows for easy access through a debit card, online banking, and a bill-paying service.
If you can’t locate such an account, you might have a different problem.
Here are a few alternatives that might help you locate a suitable checking account.
Why It Matters: Keeping money for spending separate from money for saving helps people manage their cash flow and prevents accidental overspending. It’s much harder to control your budget if you can’t even see the boundaries between the amounts you’ve set aside for different purposes. Clear is better than foggy. And the clearer your budget boundaries, the better your financial control (Friedline & West, 2016).
2. Emergency Fund Savings Account
This account is only for your emergency fund. This is usually 3 to 6 months’ worth of essential living expenses. It should be easily accessible but separate from your spending accounts to discourage casual use.
The Importance of Matter: Having a specific fund for emergencies strengthens financial viability against life’s unforeseen hurdles, such as losing a job or dealing with a health crisis. Its separation promotes discipline and keeps it away from situations calling for use of what most would think of as liquid assets.
3. High-Yield Savings Account
A savings account that offers high yields combines very high interest rates with a very low risk of losing your money. It is not, however, a replacement for a checking account. Your money is not as accessible in a high-yield savings account as it is in a checking account. While checking accounts allow infinite transactions and virtually no hold periods, high-yield accounts have transaction limits and may impose penalties for excessive withdrawals.
Significance: Achieving higher interest earnings and preserving liquidity leads to faster goal accomplishment. Studies in behavioral economics show that when people save for a specific goal and can see the growth of that savings, they are much more motivated to save and have a much higher persistence of saving (Thaler & Benartzi, 2004). This seems to be true, even when the interest rates are not that high. The way we frame the seeming low rates can have a large impact on saving motivation.
4. Retirement Account (IRA or 401(k) Linked)
Although their management is commonly associated with brokerage firms or employers, many banks now offer Individual Retirement Accounts (IRAs), as well as 401(k) rollovers, that they manage directly. For long-term wealth building, these accounts are of almost paramount importance; and their growth, almost exclusively tax-advantaged, is facilitated in law and practice by a variety of mechanisms.
The Importance of This: Saving for retirement should begin in earnest and proceed consistently if one hopes to achieve financial independence post-career. The benefits of saving in terms of both compounding and tax effects are such that one should save as much as possible in the period well before retirement, when one’s “nest egg” is still in its infancy.
5. Joint Account for Shared Expenses
Managing shared household expenses with a spouse or partner is much easier when both have access to a joint checking or savings account. The two can pay rent or mortgage, utilities, and family bills without one running to the other for money.
Why This Is Important: Joint bank accounts make it easier for couples to manage their money in a transparent, collaborative way. And when couples manage their money in a way that is easy to understand, they are less likely to experience conflict over finances. This reduction in conflict seems to be related to whether or not they use a joint account. The more transparent couples are with their money, the less financial stress and conflict they seem to have.
6. Vacation or Fun Fund Account
Setting aside money for fun keeps you on track financially—and allows you to enjoy life. Guilt-free spending is possible when you know exactly from which account money is flowing. This is the purpose of my “fun fund.” It is an account that, and I hope to make this clear, is not about spending money for the same old stuff. This is about growing my account. That’s what we are going to work on at the end of this chapter.
Why It Counts: Studies indicate that setting aside money for fun raises the happiness quotient and is a sign of healthy financial management (Friedline & West, 2016).
7. Investment Account Linked to Brokerage
For people with savings that exceed the basic level, a bank-integrated investment account allows simple access to cash that has been set aside for investments in the stock market, bonds, or other such ventures.
Why It Matters: Building wealth over time requires more than what savings accounts can offer. Investing in mutual funds, for instance, pays off in the long run. One way to structure that investment is to open an account in it at your bank, linking it with your checking and savings accounts, so that when you want to transfer money to invest, you can do so easily.
How These Accounts Work Together
Maintaining several accounts fashions an atmosphere where each account has a designated function in the financial ecosystem. For instance, when my paycheck arrives, it is deposited into my primary checking account. A step I adopted from the previous Restore Your Financial Command program is an automated transfer from checking to savings. I have set it up so that a fixed amount comes out of checking and goes into savings. By using several accounts in this way, I can clearly see how I am funding the different parts of my financial life.
Tips for Managing Multiple Accounts
- Execute Regular Payments: Set up regular automatic payments and transfers to occur between your accounts, allowing money to move consistently and with minimal manual intervention. In the context of this list, where the actions are all to be executed in some order, it is easy to see that these first two items describe a way to achieve maintaining a balance in an account.
- Utilize Internet Banking: Control all your banking accounts via a singular platform or app for straightforward supervision.
- Examine and Correct: From time to time, look at the account balances and correct the contributions to match the goals and any other factors that may have changed.
- Select accounts that charge no fees. That means no monthly maintenance fees and no minimum balance penalties that can cut into your savings. Why is this important? Wearing down your savings over time with account fees is just the kind of thing that can lead to less wealth in the future.
Scientific and Practical Foundations
Behavioral finance: purpose-driven account stratification improves spending control and saving motivation. (Thaler, 1999)
Financial Resilience: Having dedicated emergency funds decreases the likelihood of being affected by financial shocks (Lusardi, 2019).
Saving with a target in mind and being able to see how close one is to that target amplifies saving and makes one feel better about it.
Joint accounts bolster financial communication and enhance the probability for success in partnerships.
Building Wealth: Contributions made early to retirement accounts harness the power of compound interest, enabling securities to grow over the long term.
Conclusion
Financially smart people harness the power of multiple bank accounts to create order, discipline, and efficiency in managing money. From everyday spending to saving for emergencies, fun, and retirement, each account has a role in a comprehensive financial plan. Establishing and managing these seven types of accounts can transform your relationship with money and set the foundation for long-term financial success.
References
- Bogle, J.C. (2017). The Little Book of Common Sense Investing.
- Dew, J., & Xiao, J.J. (2013). The financial management behavior scale: Development and validation. Journal of Financial Counseling and Planning.
- Friedline, T., & West, S. (2016). Budgeting practices and financial well-being: A behavioral finance perspective. Journal of Family and Economic Issues.
- Lusardi, A. (2019). Financial literacy and financial resilience: Evidence and implications for financial education. Journal of Pension Economics and Finance.
- Lusardi, A., & Mitchell, O.S. (2011). Financial literacy and retirement preparedness: Evidence and implications for financial education programs. Business Economics.
- Shefrin, H., & Thaler, R.H. (1988). The behavioral life-cycle hypothesis. Economic Inquiry.
- Thaler, R.H. (1999). Mental accounting matters. Journal of Behavioral Decision Making.