Different Types of Bank Accounts and How Many You Should Have
October 16, 2020 by Daniel Azzoli
When you’re trying to organize your finances, it’s important that you start this process by asking yourself the right questions. One of the most basic but necessary things you might be wondering is, “how many bank accounts should I have?”. The more, the better, right? Well, not exactly.
As the number of bank accounts you have starts to go up, the harder it may be for you to keep track of all the money you’ve been funneling into them. And staying organized is one of the key components of financial responsibility. Why? When you’ve managed to organize your finances, you may have an easier time paying off debt, saving your money, and hitting your overall financial targets.
How can having the right mix of different types of bank accounts help you with these things? Today we’re going to try to answer this question and go over some of the most common types of bank accounts in the process. Let’s get started!
Common Types of Bank Accounts
There’s a wide array of different types of bank accounts out there and they all have their own specific uses. Some of them will be well-suited to your financial needs, and some may not. Either way, it’s important to understand what may be available to you and what they should (and shouldn’t) be used for. So, let’s go over some of the most common types of bank accounts out there.
1. Savings Accounts
You may have already guessed it, but savings accounts are for, well… savings. These are typically intended to serve as a place for people to put funds aside to use down the line. They also might be the first actual bank account that you ever open.
Parents may open a savings account along with their children to get them started early on the path to saving money. Teenagers may also start savings accounts to put aside money they’ve been earning from a part-time job.
Overall, they’re a great place to put your money when you’re trying to hit specific financial goals or save money for specific reasons. Particularly when you want to keep this money separate from the money you use for everyday expenses.
2. Checking Accounts
Checking accounts are another one that you’re likely already familiar with. These types of bank accounts are connected to a debit card that you may use for everyday purchases and to withdraw money from ATMs. These accounts also give you the ability to write checks and could generally be where your paycheck may be deposited into. You can also pay bills online through your checking account depending on the service provider.
Generally speaking, this is one of the most basic types of accounts and is best suited to store cash that you use for short-term purchases and regular expenses.
On the flip side, the money you put in a checking account doesn’t typically grow in interest, and there may also be certain fees and restrictions that come along with these accounts. These could include things like minimum balance requirements and maintenance fees. Not all checking accounts have these however, so make sure to talk to a representative from your bank – or look at what’s being offered at multiple banks – to find the best fit for you.
3. Retirement Accounts
Retirement accounts are designed to help you save money well in advance of your retirement. If you’re looking to open a retirement account independent of your workplace, then you may want to open an Individual Retirement Account (IRA) through your bank. Alternatively, you may be able to contribute to your retirement via a 401 (k) which is provided by your bank through your employer.
One of the main benefits of accounts designed for retirement savings is that they’ll have some sort of tax advantage. For example, with a 401 (k) and a traditional IRA, you won’t need to pay income tax on the growth of what you’ve contributed to your account each year, but depending on the type of account, you will have to pay taxes on this money at some point. With a 401(k) and a more traditional IRA, you’ll be required to pay taxes when you withdraw this money. With a Roth IRA, you’ll pay taxes on your growth right away, but not on withdrawals. They all have their advantages, so you’ll need to determine what suits you best.
Overall, these accounts can be very useful when you’re looking to invest your money, ease some of the burden of taxes, and put money aside for your future. Just keep in mind that when there’s a tax benefit in the equation, there are usually some stipulations that come along with it. Make sure you understand how your taxes will be affected, be aware of any restrictions or penalties you may face, and educate yourself before you invest your money.
4. Certificates of Deposit (CDs)
Certificates of deposits act as savings accounts that you deposit money into for a specific amount of time. Generally, you’ll earn higher interest rates with a CD than you would with a typical savings account, but you’ll need to leave your money untouched for the predetermined term. If you do try to withdraw before the end of that period, you’ll likely incur a penalty.
These accounts can be useful when you’re saving money for something that has a fixed start date. For example, let’s say you’re planning a vacation a year ahead of time. You may want to use a CD to save money for your vacation.
Why Should You Consider Having Multiple Bank Accounts?
As we’ve seen, there are a number of different types of bank accounts out there, all with different uses, and we’ve really only scratched the surface. But how can having multiple bank accounts potentially help your financial situation? Let’s take a look at some of the key benefits.
1. Hit Different Savings Goals
While trying to save money is great, it may be a little more difficult when you don’t have a specific goal you’re aiming at. This can be especially true when you have more than one goal you’re saving for. Maybe you’re trying to save up for a down payment for a car, save money for a vacation, and are also planning to buy a house in the next five years. Opening multiple savings accounts will allow you to put your money in the account that’s best suited to that particular goal, and it can also help you organize your finances.
2. Prepare Yourself for Emergencies
When you’re looking to save money, one of the most important goals to have is to prepare yourself in case of an emergency. In these instances, your first resort should be your emergency fund. This should be a savings account that will give you some sort of return, but won’t charge you for making a withdrawal. So if you run into an emergency, you should be able to access this money easily. You should also make sure that this money is separate from your other savings.
If you do run into an emergency without the savings to handle it, you may want to look into online loans. Do your research on things like online installment loans, lines of credit, and payday loans online. Online loans may be a way for you to get the money you need for emergency expenses when you have no other option.
3. Leverage Perks from Different Banks
Different types of bank accounts are not all one and the same. They come with different uses, different interest rates, and different perks. And these variances can be spread not only across different types of accounts, but also across different banks. Having multiple accounts may help you take advantage of the different perks offered at competing banks.
For example, with one bank, you may be offered a checking account that’ll give you cashback on grocery store purchases. Another may offer a savings account with a higher yield than the first bank is able to offer.
As long as you have an actual need for these accounts and you’re not opening them simply for the perks, it may make sense to research what’s offered at competing institutions. You should be mindful of the fact that there are sometimes fees that come along with opening new bank accounts, so be sure to factor that into your decision.
Consider Different Types of Bank Accounts for Different Needs
If you’re trying to take control of your money and organize your financial future, it may be a good idea to open multiple bank accounts. Doing this can help you gain a greater insight into what use your money is being put to, it can help you stay organized, and it can help you work towards varying financial goals.
Ultimately, it may help to expand the opportunities that are out there for you. Just make sure you don’t bite off more than you can chew. It’s great to take advantage of the specific uses and different perks of different bank accounts, but as we’ve already mentioned, you should never open a new account for the sake of it. You should typically only consider it if you have a clear purpose for that money and are able to manage whatever funds you’d be putting into it.