The question of how many bank accounts someone should have is certainly one that can be qualified as a first world problem.
Nonetheless, if there is an optimal number that can help make managing your personal finances more effective and efficient, why not make an effort to reach that!?
When it comes to bank accounts, there tend to be two main groups of people: those who have one current account and (maybe) one savings account and those who take the ‘squirrelling’ approach of multiple bank accounts, with cash spread between them.
The most effective approach to bank accounts is probably actually somewhere in the middle of those two most commonly encountered groupings.
Having more than one savings account can have significant advantages when it comes to effectively managing and tracking savings goals.
On the flip side, having too many accounts can also become an administrative nightmare and make it difficult to keep on top of personal finances.
So how many savings accounts is the optimal number?
As with most things in life, there is no one definitive answer to that question and it will very much be a case of personal or family circumstances.
However, there are certainly some guidelines to keep in mind that just make good, simple sense and make a positive contribution to achieving savings goals.
Structuring your bank accounts along these guidelines might mean embarking upon a process of consolidation and closing some accounts, or alternatively, it might mean opening new accounts.
It may also simply mean keeping the accounts you currently have, defining the purpose of each more clearly and subsequently using them for that specific purpose rather than spreading funds among them ad-hoc.
Here are some simple rules of thumb to keep when it comes to efficiently managing your bank accounts:
Each account you hold, savings or current should have a clear purpose.
A current account is there for day-to-day and fixed overheads. You receive your salary into it and pay regular monthly and daily expenses out of it.
For singles, usually, one current account is perfectly sufficient.
Couples might choose to have both a personal current account for daily and personal expenses such travel, lunches and clothing. They may also choose another combined current account for joint expenses such as household bills and the rent or mortgage.
More than a personal, or a personal and joint account for couples, is almost always an unnecessary over complication.
Keep separate savings accounts for individual savings goals
This is a tried and trusted approach recommended by financial advisers.
In many circumstances splitting savings goals between dedicated savings accounts for each goal is, at bottom, a psychological benefit rather than a practical necessity. However, sometimes it’s the psychological impact that is strongest and shouldn’t be underestimated.
The Scrum project management methodology that is becoming an international standard insists on everyone standing up rather than sitting down during daily team meetings. The empirical evidence clearly demonstrates that this makes these meetings far more time efficient than sit-down equivalents.
Is it possible to have exactly the same meeting while everyone is sitting down? Of course it is. Does that tend to happen practice? No.
In the same way, it is of course practically possible to have one savings account with £30,000 in it and know that £10,000 of that is earmarked for a new kitchen, £15,000 is general emergency savings and £5000 is the year’s holiday budget.
However, human psychology dictates that the vast majority of people have more success in both achieving savings goals and not dipping into cash intended for another purpose when funds are distinctly separated between different accounts.
The future will likely bring the option to open one savings account with distinct sub-sections. There are already some apps that have been developed to work together with a bank account and visually distinguish funds by savings goals.
However, this is still a development in its infancy and it will be a few years before this becomes a standard function of savings accounts.
In the meanwhile, it will almost certainly help you stick to savings targets and not dip into other savings if you open different accounts for different goals.
Different accounts to take advantage of better terms and conditions
It makes sense to shop around and open savings accounts that offer the best terms and conditions to match your specific savings goals.
For longer term goals, you might be happy to lock funds in for a certain period of time, allowing you to take advantage of less ‘easy access’ savings accounts which often offer a significantly better interest rate. If you know it will take you several years to reach the required value of funds, a lock-in period might not be an issue.
For shorter-term goals, such as an annual holiday, you will want funds to be accessible and will need an easy access savings account from which you can withdraw minus any penalties whenever you choose.
Some savings accounts also offer a higher interest rate for a fixed period of time, such as the first year. In this case, it can make financial sense to take advantage of a promo period, and then move the funds to another account when that period expires.
Statistically, most savers won’t do this, which is why these promos are offered to tempt them in. But if you do then there is nothing to stop you simply opening and closing accounts to take maximum advantage of fixed-term promo interest rates.
Having separate accounts for savings which take advantage of specific government tax breaks, such as ISAs and pension savings, will also make it much easier to keep track of how much of your annual allowance you have taken advantage of during the current and previous tax years.
This will make any paperwork you subsequently have to put together for tax returns much easier.
Close dormant accounts
Once you have achieved a savings goal and spent the funds accumulated the temptation is to keep the account with the assumption “I’ll use it again for the next savings goal”.
However, practically speaking this approach can easily become the beginning of the slippery slope to once again getting into the position of owning a plethora of accounts.
Before you know it you could quite easily have 10 different accounts, several of which are unused legacies from previous savings goals, doing nothing other than making your personal finances management messy again.
To avoid this simply close savings accounts when your savings target has been achieved and the money spent. It will take you 15 minutes to open a new account when you embark upon your next savings mission.
This will also save you paying unnecessary annual admin fees that many savings accounts charge on those not currently in use and allow you to shop around for the account with the best terms for your next savings mission.
- Spread your risk
It might sound alarmist, and recent history in the UK demonstrates it is not a big worry, but banks and national finances (Cyprus as the most recent example) do occasionally go under.
Even if cases like Northern Rock show that the UK government has been ready to step in to protect savers and bail out troubled financial institutions when necessary, there is no guarantee that will always be the case in the future.
It’s better to be safe than sorry and in the UK £85,000 in personal savings is protected per institution, not per account.
For those lucky enough to have cash savings that add up to more than £85,000, it is prudent to split funds between savings accounts between banks under wholly different ownership.
In the worst case scenario, you will then know that any savings up to £85,000 in one account are 100% protected.
Even if there is some delay in retrieving funds if a bank goes under you still have savings you can access from another account with another bank.