Should You Have Multiple Bank Accounts?

Having multiple bank accounts – including different kinds – can help you strategize with your money and minimize risk in the event of a financial downturn. Many people open new bank accounts to separate money they want to save from money they need to spend on necessities. People also use extra accounts to earn more interest on the money they put in the bank. It’s not bad to have multiple bank accounts, but the benefits of this practice do present some risks.

Before we get into the pros and cons of opening up more than one bank account, let’s take a look at the main types of accounts and how they function.

Different Types Of Bank Accounts

The right type of account to open can differ drastically from person to person, depending on their financial goals. Below, we’ll look at some common types of bank accounts so you can better decide when you might want to open a new one and the type of account to open.

Checking Account

The most standard type of bank account is the checking account. With this type of account, you typically receive a debit card to use for purchases or to withdraw money from ATMs. A checking account also usually comes with the ability to write checks. For safekeeping purposes, most people have their employer make a direct deposit – with at least a significant portion of their salary – into a checking account whenever they get paid.

Checking accounts have the following potential drawbacks:

• Typically, checking accounts don’t accrue interest.
• You may face ATM fees, account maintenance fees or overdraft fees.
• You may have to make a minimum deposit to open a checking account.
• A minimum account balance may be required to keep your account open.

Business Checking Accounts

If you’re a business owner, you might want to consider opening a business checking account. Even if you have no employees and are a sole proprietor of your business, having a business checking account can be a good way to keep your personal and business finances and expenses clearly separate. When tax season arrives, these two categories being distinct can be a significant help.

Savings Account

A savings account, similar to a checking account, is a way to keep your money safe. The main difference, however, is that savings accounts are designed for long-term investment. With a savings account, the goal isn’t to spend but to reach specific savings goals. You can store your money, backed by the Federal Deposit Insurance Corporation (FDIC), and earn interest on a yearly basis. However, savings accounts usually only allow six withdrawals per month, under Regulation D. If you need to take out money after that sixth withdrawal, you may be subject to additional fees.

When opening a savings account, you’ll want to consider the annual percentage yield (APY). This represents the amount of interest, or extra money, your deposit(s) will earn over time. Accounts with generous APY rates are considered high-yield savings accounts and can be especially useful if you’re looking to earn interest for a future expense, such as:

• An upcoming wedding
• College tuition
• A new home purchase
• An emergency fund
• A retirement account

Certificates Of Deposit (CDs)

Certificates of deposit (CDs) are an alternate form of savings account. They earn higher interest rates than even high-yield savings accounts but are subject to additional regulations and requirements. Consider those additional requirements and compare them to the CD rates to see if this is a good match for you.

For example, the withdrawal date is fixed, meaning you sign up for the account, make your initial deposit and then wait until the withdrawal date comes around to take your money out of the account. Removing your money beforehand can cause you to incur significant interest penalties. If you’re saving for a shorter-term goal, this may not be the best option.

Money Market Account (MMA)

If you’d prefer to open a single account with some of the qualities of both savings and checking accounts, you might want to think about a money market account. Like checking accounts, MMAs typically allow you to write checks and may come with a debit card. Like savings accounts, though, money market accounts accrue interest.

There are a few caveats to consider before opening a money market account, however. Like a savings account, money market accounts are subject to Regulation D. Thus, you can only make a withdrawal six times per month before additional fees or fines kick in. Also, MMAs usually compensate for higher interest rates by having higher minimum balance requirements.

Cash Management Account (CMA)

Typically offered by online banking institutions and brokerages rather than traditional banks, CMAs function primarily the same way as checking accounts. They usually come with debit cards, allow for unlimited withdrawals per month, and can include additional perks such as cash-back rewards, fewer fees and lower minimum deposit requirements. Online brokerages use this type of account for savings, checking and investing, rather than opening multiple accounts.

Pros To Having Multiple Bank Accounts

People decide to open multiple bank accounts for various reasons. It can be a great strategy for organizing and managing your wealth. Specifically, multiple bank accounts allow for:

• Budgeting: Separating your money into different accounts can help you create and stick to a budget. For instance, you can make it a rule that, barring emergencies, you don’t withdraw from a specific account.
• Flexibility/liquidity: Since some account types have restrictions on withdrawals, you may want to set aside money into a separate account for daily expenses.
• Advantageous benefits: Financial institutions often have enticing promotional benefits for opening new types of accounts. If managed correctly and responsibly, multiple bank accounts can allow you to take advantage of these various sign-up benefits, perks and bonuses.
• Income organization: Much like with budgeting, you might be in a situation where you need to separate your money for tax purposes. For example, couples often create a joint account for money spent on the family but have individual bank accounts for personal spending cash.

Cons To Having Multiple Bank Accounts

Before you decide to open more than one bank account, you should also consider some potential drawbacks. Depending on your financial situation and both your short-term and long-term goals, it might be better to stick with a single account for managing your money. Reasons for this include:

• Fees: Instead of just the costs associated with one account, multiple bank accounts can mean paying maintenance, overdraft, early withdrawal and/or additional monthly fees for each account. These can add up, costing you more money than the accounts save.
• Locked-in money: Since accounts often have minimum deposit requirements, opening up several accounts can mean locking your money away. Before deposits start earning interest, this could cause problems when it’s time to pay bills.
• Management difficulties: Just from a logistical standpoint, keeping up with several accounts can be more time-consuming and stressful than just keeping track of one.

Multiple Bank Account FAQs

We’ve compiled a short list of answers to frequently asked questions about multiple bank accounts. See the answers below if you’re contemplating whether to use this investment and wealth management strategy.

Is it Okay to have multiple bank accounts?

Yes! It’s perfectly legal to have multiple bank accounts – and have accounts at different financial institutions – as long as you abide by the appropriate regulations and restrictions. It’s also okay from a money management perspective, as doing so can have several benefits. Banks may offer promotions and special perks for new customers.

Does having multiple bank accounts affect my credit score?

There’s no direct penalty to your credit score for having multiple bank accounts. However, signing up for an account may require a credit inquiry, which can temporarily adversely affect your score. Also, if you overdraft from several accounts, credit companies can view this as evidence of financial unfitness.

Should I keep all my money in one bank?

It’s fine to keep your money in one bank as long as the total amount you’re keeping there is no more than $250,000 per account type. This is because the FDIC insures deposits only up to that amount. Exceeding that limit in one bank can be dangerous since the failure of that financial institution could result in you only recuperating $250,000.

What disqualifies me from opening a bank account?

Qualification criteria varies from one financial institution to the next, so there’s no one answer to this question. Typically, banks look at your debt-to-income ratio (DTI), your credit score and recent banking history to determine whether you’re eligible to open an account with them. You may also face disqualification if you had too many overdrafts in the past or have violated banking regulations.

The Bottom Line

Using multiple bank accounts can be a great way to organize, manage and grow your wealth. However, before making your decision, take time to think through the pros and cons associated with keeping track of these accounts. Consider working with a financial advisor to nail down your short-term and long-term personal finance goals and see how they match up with a strategy that involves having different bank accounts.

For help managing your money and creating a budget that works for you, download the Rocket Money℠ app today.