The age-old adage, "don't put all of your eggs in one basket," cautions us against putting all of our resources in a single, risky endeavor. This well-established proverb can easily apply to savings accounts -- a risk-averse way to put money aside for a rainy day. Savings accounts are low-risk deposit accounts that enable you to build a fund that can be used for such purposes as emergency savings or to reach a financial goal.
Banks use deposit accounts to fund their lending operations. In exchange for the right to invest your money and turn a profit, a bank, or a credit union, will pay you interest on the balances it collects. Your money grows in addition to being stored safely at a bank or a credit union that's insured with the federal government. Savings accounts are insured against loss by the Federal Deposit Insurance Corporation, if opened through a bank, or the National Credit Union Administration for accounts in a credit union for up to $250,000 per person.
But if you're like half of Americans polled in a recent GoBankingRates survey who said they're loyal to only one bank and keep their reserves in one place, then you are overlooking seven practical reasons to have more than one savings account.
1. Automate savings growth
The out-of-sight-out-of-mind principle comes in handy when savings accounts aren't connected as overdraft protection or with simple transfer access to your main banking account. You're less likely to consider accounts for daily expenses or impulse purchases if you're not constantly reminded that the savings balance exists. Combine this with an automatic deposit or transfer, and your balance can grow unscathed. Separate savings accounts can leverage the set-it-and-forget-it approach.
2. Reduce the chances of overspending
Separate banking institutions can provide a helpful hedge against overspending. While the accounts can be linked to facilitate Automated Clearing House Network transfers, such transfers generally take up to three business days to complete. The extra effort required to transfer funds and the time required to complete a transaction provides a cooling-off period. Impulse buys, or unnecessarily extravagant purchases, can be filtered out with less immediate access to your savings account.
3. Find the best yields
In this era of rising interest rates, shopping for savings accounts offering the best yields is a must if you want to grow your savings. CNET regularly updates a list of thewith many offering online applications available nationwide. Given that most banks or credit unions offer top-notch security, access and a variety of services, finding the account with the highest annual percentage yield, or APY, will help your money keep up with the .
4. Track your progress
When working to reach financial goals, using separate accounts to track progress is a solid strategy. Some people use separate accounts to save for big-ticket items such as saving for college, making down payments on a car or home, or taking a life-changing vacation. Separating savings accounts will clarify how close you are to a specific goal. The visual reminder can boost the momentum to help you stay focused on your goal.
5. Keep your money insured
The federal government started backing banks as a part of the New Deal under President Franklin Roosevelt as a policy to address bank failures during the Great Depression of the 1930s. As mentioned earlier, deposit accounts are covered at banks and credit unions that are backed by federally insured organizations such as the FDIC and NCUA by up to $250,000 per person, covering all accounts at any one banking institution. When deposit account balances approach that magic number, opening a new savings account at a separate bank is not only wise but essential to ensure that your money will be covered against bank losses or failures. While the banking industry is fairly stable, bank failures have happened in recent years.
6. Take advantage of bonuses
are a useful incentive to open a new savings account. These bonuses can range from a few hundred dollars to $500. The bonuses do come with conditions that can range from direct deposit minimums required to maintaining a monthly balance over several months.
7. Manage accounts for minors
Establishing a savings account for minor children is a great way to help them establish healthy financial habits at an early age and introduce them to practical financial training. A separate account can help them set savings goals and begin to develop financial literacy that will aid them in adulthood.
Steps to take when setting up multiple savings accounts
- Identify why you need multiple savings accounts. This will determine the number of accounts you need and how you want the accounts to interact with each other. For example, if you're saving for a new car because you want to pay cash but you're also saving for an international vacation, separate accounts will help you stay on top of your savings progress for both plans.
- Inquire about APYs and specials your bank offers. Contact a bank representative and inquire about opening additional savings accounts with higher APYs and if there are specials or bonuses available when you open another account.
- Research the top high-yield savings accounts using online resources such as CNET's guide to the . You can compare several features in addition to APY, such as monthly fees, minimum balance requirements and ATM access.
- Decide how you want to access your money. Do you need a physical bank, with customer service, to access your funds in person, or do you prefer an online-only bank where you can manage your funds from the comfort of your home? If the bank has physical branches, would having convenient access to services tempt you to tap your account? You should also decide how you want your bank accounts linked. The ability to deposit funds at regular, automatic intervals is key to building a healthy savings habit.
- Schedule time to review your accounts regularly. Add a calendar reminder at least once a month to review your savings goals and multiple account balances.
When should you avoid opening multiple accounts?
Having multiple accounts can be a great strategy to build and protect your savings, but there are situations when opening an additional savings account isn't advisable.
- The new account charges service fees.
- You can't deposit enough to waive monthly service fees.
- You don't want to pay taxes on the bonus paid in your new account.
- You can't satisfy the requirements that make opening a new account feasible, such as a minimum monthly direct deposit amount.
How many savings accounts should I have?
That, of course, depends on your personal financial goals. There's no one correct answer. Aligning the number of accounts with major savings goals is one approach. If you find that adding or removing accounts will simplify your life and make tracking your progress easier, then adjust accordingly.
Additionally, making sure that your balances in one bank don't exceed the federal insurance limits offered by the FDIC or NCUA can help you determine the number of savings accounts that make sense for you.
How many savings accounts am I allowed to have?
While some banks may limit the number of accounts you can open internally, there's no limit to the number of savings accounts one person can have. Opening savings accounts at multiple banks or credit unions will nullify any limits imposed by a single bank. What's more, there's no impact on your credit score for having multiple accounts.
Should I diversify my savings accounts across different banks?
- Your account balance at any one bank will exceed $250,000.
- You find a better APY offer than your current bank without additional fees that cut into your overall returns.
- You want to employ strategies that track savings goals with individual accounts and one bank limits the number of accounts per individual.
The bottom line
Savvy savers use the strategy of opening multiple savings accounts to help them focus and reach their financial goals. Using multiple savings accounts at different banks and/or credit unions provides a structure that can help you avoid impulse buys and overspending while setting your savings process on autopilot.