Whether you're spending or saving your money, having a bank account offers benefits of convenience, security and flexibility that keeping all your cash on hand just can't provide. However, there are many types of bank account options you can consider, and each type has a unique purpose, plus benefits and disadvantages.
Bankrate suggests having separate accounts for checking and savings, as this provides benefits without making it hard to keep track of your money. But the exact number of accounts you need depends on your financial goals and preferences. Learn more about deciding how many bank accounts you need and which common account options are out there.
Overview of Bank Accounts
Bank accounts provide a place to store your money for transactions and often offer the potential to earn interest, depending on the type of account. Thanks to bank accounts, you can do things like pay your mortgage and credit card bills online, send transfers to others and more easily keep track of how much money you have and where it goes. Except for certain investment accounts, your funds usually have federal insurance that provides protection in case the financial institution fails. It's also a lot harder to lose money when it's in the bank than in your wallet.
Bank accounts exist in two categories: checking accounts and savings accounts. Within these categories, there are several varieties of accounts. For example, you can find savings accounts geared toward retirement savings or major purchases. As well, there are checking accounts that come with different features and perks and may appeal to certain groups like students and rewards seekers.
You can sign up for bank accounts at either banks or credit unions. Both offer similar products except that credit unions set specific requirements to become a member and may have fewer product offerings than big banks. Further, banks tend to have more locations available and thus can make it more convenient to use their services. Both banks and credit unions tend to charge fees for bank accounts, and the interest rates and customer services vary by institution.
Reasons to Use Multiple Accounts
Using just one bank account may seem like the easiest option since that's only one account to keep track of, but there are several reasons why you might consider opening multiple accounts. Here are a few of them:
- Flexibility: Since not all bank accounts have the same purpose, opening a couple of different types can give you more financial flexibility to meet your savings goal. For example, since savings accounts aren't made for daily spending, you run into limitations if you don't have a checking account as well. On the other hand, opening a separate account for retirement savings can allow you to explore options that offer a better return or allow for diverse investments.
- Variable account terms: Account terms and perks vary, so a single bank account may not always meet your needs. For example, maybe your basic savings account works fine for saving for your new car, but you'd likely want a higher return on your retirement savings than the basic savings account offers. Therefore, you might explore retirement savings accounts instead that can help you get higher interest. At the same time, checking accounts at different banks may offer perks where you can benefit from both options.
- Separate accounts for couples and businesses: You and your spouse might consider opening separate banking accounts to manage money separately and save for individual goals. On the other hand, if you're a contractor or business owner, you might have separate accounts for personal and business transactions so that there are fewer headaches come tax time.
- Security: When you have multiple bank accounts, you can avoid having your money tied up in one place when you opt for different financial institutions. This offers peace of mind that you can probably still access cash even if something happens where the systems at one of the banks or credit unions go down. There's also the confidence that Federal Deposit Insurance Corporation Insurance can give you. You get up to $250,000 of your money protected at the bank if a failure happens, and you can allocate funds in different accounts at multiple institutions whenever your cash exceeds that.
Learning About Standard Savings Accounts
The most basic type of savings account is one where you deposit your cash or checks and then earn a small amount of interest. Depending on the bank, you may need to make an initial deposit of anywhere from $25 to $100, but you can find some options without this requirement.
You can withdraw your money through an ATM or teller, request a check or move the funds between bank accounts. However, this type of account isn't for daily purchases as there's typically a withdrawal limit for certain transactions. For example, you don't need to worry about a limit for in-person withdrawals through a teller, but there's a six-per-cycle limit if you're doing electronic transfers, using a check or taking advantage of phone banking.
A standard savings account works great for preparing an emergency fund or saving for a big purchase like a car. However, the low interest earned on most accounts can make this option less appealing to those focused on long-term savings or maximizing their return. Seeking high-yield savings accounts at online banks can get you a higher rate in return for likely not having a local branch. Further, you should keep in mind that while you may get less in interest, this type of savings product is more flexible than others that charge fees for withdrawals made before a certain time.
Considering a Checking Account
Whenever you're looking for a bank account that you can use to pay bills and handle daily transactions, then a checking account fits your needs. Like with savings accounts, you can deposit cash and checks, set up direct deposit and sometimes even earn a little interest. However, you usually get a checkbook as well as a debit card that you can use to pay bills and buy things.
You usually don't need to worry about going over a transaction limit or paying a fee after six withdrawals since this type of bank account is made to be very liquid. However, you can incur fees for ATM use and need to pay maintenance fees to keep your checking account current. The good news is that you can reduce or eliminate fees if you use certain ATMs or have other accounts at the bank that qualify you for a maintenance fee waiver.
There are plenty of checking accounts that offer features appealing to people with certain needs or goals. For example, you can find basic checking accounts without fees or interest alongside high-interest checking accounts that might charge a higher monthly maintenance fee. You can also find some that give you cash back for daily purchases as well as checking accounts that help people build their credit.
Exploring Certificate of Deposit Accounts
Certificate of deposit accounts differ from regular savings accounts in that you're not supposed to withdraw your money at all for an agreed period of time after you open the account. At the same time, they offer competitive interest rates, so these accounts can fit your needs if you're saving for something and won't need the money for a while. Often, you agree to keep your money held for between a month and five years, but you can find even longer terms at some banks.
Typically, you make a one-time deposit and either withdraw your money or roll it over to another account when the term is up. This kind of account still comes with FDIC insurance, and whatever interest rate you get usually is set for the life of the CD. So, this kind of account can work out for you if you want predictability. If you do need to take the money out early, you need to take the whole amount and pay a penalty the bank sets – typically meaning you give up some earned interest.
Read More: What Is a Certificate of Deposit (CD)?
Considering a Money Market Account
If you're looking for sort of a hybrid account that can offer better interest than a regular savings account but lets you spend your money more easily too, then consider adding a money market account to your financial products. These accounts tend to provide a checkbook you can use for daily transactions, and you may also have a debit card like with a checking account. The money in your account earns a competitive interest rate while being more easily accessed than with a CD.
While these benefits can make a money market account appealing, there are some key considerations to know. Since this is technically still a savings account, the withdrawal limits usually still apply. You can also face a large minimum deposit requirement upwards of thousands of dollars at some institutions. You might also find that these accounts have higher maintenance fees in exchange for the extra conveniences offered.
Opening Roth or Traditional IRAs
When you're saving for retirement, consider traditional and Roth individual retirement accounts as they come with tax benefits and allow you to invest in products like stocks and bonds. A Roth IRA has earned income limits that traditional IRAs don't, and but this account lets you make withdrawals without taxes or penalties once you're 59 1/2. A traditional IRA gives you tax savings now since your contribution is excluded from this tax year's income, but you pay taxes later when you withdraw the money and will need to make mandatory distributions once you turn 72.
With either type of IRA, you can get a higher return than other savings accounts if your investments do well, but this kind of bank account means dealing with the instability of the market. FDIC insurance still applies to cash deposits but not the investments made with the cash deposited. Therefore, you need to be willing to take on more risk with this option.
There are also contribution limits to know. According to Internal Revenue Service rules for 2020 and 2021, you can put $6,000 a year in either of these IRAs if under 50 and $7,000 if at least 50. And if you needed to make early withdrawals of your money, you can expect to pay a 10 percent penalty unless you can qualify for a waiver.
Deciding the Number of Accounts
Now that you know the types of bank accounts out there and their uses, you can consider your financial situation and needs to determine which could benefit you. There's no one answer to the optimal number of accounts, as it depends on the individual.
For example, if you're not saving for retirement or another major goal, then two accounts – one for checking and one for basic savings – could be enough at this point in your life. On the other hand, if you're saving for retirement and a new home, then you might add an IRA and CD to your financial portfolio to benefit from higher interest rates for longer-term goals. If you're married, you might even have more accounts to manage separately and together.
When deciding how many bank accounts to use, you want to keep simplicity in mind and understand the work you need to put in when managing several accounts. This means that you shouldn't just open a new bank account unless there's a specific purpose. Keep in mind that having several accounts can mean several fees to pay alongside the need to keep an eye on each account regularly. To make managing multiple accounts easier, you can set up automatic payments and transfers and install banking apps on your phone for easier access to your information.
- Bankrate: How Many Bank Accounts Should You Have?
- Consumer.gov: Opening a Bank Account
- BBVA: Types of Bank Accounts: What's Right for You?
- Forbes: When To Open Multiple Bank Accounts
- FDIC: Your Insured Deposits
- Nova Credit: A Guide to the Different Types of Bank Accounts in the United States
- Go Banking Rates: 9 Types of Checking Accounts
- Investopedia: What Are the Withdrawal Limits for Savings Accounts?
- Forbes: The Pros and Cons of Money Market Accounts
- First Alliance Credit Union: Advantages and Disadvantages of a Certificate of Deposit for Savings
- Charles Schwab: Roth IRA vs. Traditional IRA
- IRS: IRA FAQs - Contributions
- Business Insider: How Many Bank Accounts You Should Have to Keep Things Simple, According to a Financial Planner
- National Credit Union Administration. "Share Insurance Fund Overview." Accessed Sept. 6, 2020.
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- Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?" Accessed Sept. 6, 2020.
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.