According to data from the Federal Reserve, there are currently 55-million unbanked Americans in the United States, accounting for 22-percent of US households.
In today’s economy, it’s essential to have a bank account. Those unbanked Americans may deal in cash or barter, but that doesn’t help if you have to send money across the country, or bank a salary check.
Some may argue that the invention of peer-to-peer payment systems, such as PayPal, help to fill the void in banking, allowing unbanked individuals to send money to others.
However, if you want to transact with employers and business, in most cases, you’ll need access to a bank account. What are the advantages of owning a bank account, and how many bank accounts should you have I your name?
If you’re one of the millions of unbanked Americans, or you’re wondering if you have too many bank accounts, this article will shed light on this facility.
Why It’s a Good Idea to Have More Than One Bank Account
Many people assume that they can only open one bank account. However, the reality is that you can open as many accounts as you like, with as many service providers as you want. No law states you can’t have more than one account. In most cases, it’s better to have more than one bank account.
Putting all of your eggs in one basket is a dangerous practice when it comes to how you manage your banking. With only one bank account, you increase your financial risk to the markets. In 2008, investment bank, Lehman Brothers, fell through the floorboards in a matter of days – resulting in the onset of the 2008 financial crisis that dealt a nearly crippling blow to the economy.
By opening more than one bank account with multiple banking institutions, you reduce your exposure to the bank taking your money in a “haircut.” Haircuts describe a practice where banks seize a portion of depositor’s savings to fund the bank’s liabilities.
You may think this is a criminal practice, and there’s no way banks can do this to their customers. However, think again. Ask the thousands of Cypriots that lost a significant portion of their savings when banks defaulted on their clients in the wake of the financial crisis of 2008.
However, America is different from Cyprus and the EU in some regards. Most banks cover their client’s deposits with FDIC insurance. FDIC insurance covers depositor’s funds in their bank accounts for amounts up to $250,000. However, many financial pundits believe that FDIC is merely a myth. Should the banks default amid a crisis, then the federal government does not have the financial assets available to cover the massive losses that will occur to the public.
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Making Use of Multiple Bank Accounts
Research shows that more than 70-percent of Americans are living from paycheck to paycheck. Most people that are in this position don’t own a bank account, as they pay for most of their expenses with cash. These Americans also tend to cash their paychecks at participating outlets that don’t require them to have any bank account to receive the money.
However, owning a bank account, even if you live from paycheck to paycheck, you should consider opening a bank account. By opening an account, you build a track record for yourself, and you can start to build a credit score. Owning a bank account that receives a steady monthly income is a beneficial financial vehicle that allows you to transact.
For those Americans that are in a steady financial position that affords them surplus income at the end of the month, typically already have at least one bank account. If their salary goes into that account, then they may notice that they start to build some savings as the month’s tick over.
However, most banks accounts, especially transaction accounts used to facilitate salary deposits, do not bear any interest. Therefore, and the savings that you have in this account are not growing. In most cases, the bank charges account costs every month, and these fees add up over a year, eating into your savings.
Therefore, it’s a prudent financial strategy to open a savings account where the fees are not as high as a transaction account. This strategy allows you to grow your savings, without the bank taking a substantial share.
Banks and other financial institutions offer a variety of accounts for different purposes, including transactions, savings, and investments. Spreading your money across these accounts allows you to save and invest, while still maintaining your monthly financial costs for any fees involved.
It’s a good idea to open savings and investment accounts with other banks other than where you keep your transaction account. This strategy mitigates your risk if one bank fails, allowing you to pull your funds from the other banks before they haircut your funds.
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The Types of Bank Accounts Available to Segregate Your Finances
You are in a fortunate position if you have surplus income after paying your bills. Here are some ideas on bank accounts you can use to segregate your finances.
Segregating your finances ensures that you avoid the temptation to dip into your primary account to fund other lifestyle expenses. Here are a few examples of what kinds of accounts to open and how they can benefit your financial position while maximizing your savings and investments.
This account serves as a vehicle to receive your salary and pay your bills. A checking account is typically the best option for your daily spending habits, and they are easy to open. Most banks only require a form of identification and proof of address, along with a minimal deposit to open the account.
Married couples can benefit from three separate checking accounts, ours, yours, and mine. With this strategy, the shared account holds funds used for household expenses, allowing the couple to contribute equally to these costs. They can set up any individual debt orders for their other fees in their separate accounts.
Money is one of the primary reasons for divorce in the United States. By separating your accounts, you separate your expenses. Using this method, one partner can keep all of their debit orders separate from the other. This strategy mitigates the risk of their partner, attaching unwanted bills to their account.
If one partner has to pay all of the bills, they may start to grow resentful at the other partner’s lack of financial responsibility and accountability. This segregated checking account method may seem like it adds more financial pressure to the household. However, it could end up saving the marriage, especially if one spouse is a saver and the other a spender.
Unfortunately, America is now a nation of spenders more than it is a nation of savers. Many people max out their credit cards every month, leaving them caught in an endless spiral of revolving credit. As a result, more than 70-percent of American households spend everything they earn and still have outstanding debt on their credit cards at the end of every month.
If you want to break the cycle of spending all of your income, consider opening a savings account. Some institutions offer interest on savings accounts. However, you probably won’t find interest-yielding facilities available at the same bank that holds your transaction account.
Many Americans think that they don’t have the funds available to open a savings account. If you’re in the position where you spend all you earn, then its time to assess your spending habits. Where could you save money? Maybe you don’t need that latte on the way to work in the morning, or you could try cooking at home more often to reduce your bill on restaurant food. Cut the cable or cancel your Netflix subscription.
If you find a way to save $50 and month, that could leave you with a significant amount of money in a savings account after 5-years of practicing this habit. Many financial experts say that when you see money growing in your savings account, it makes you more inclined to want to save more money. While putting away that $50 at the end of the month may not seem like much at the time, imagine where it would be in 10-years.
Emergency Account for Medical Expenses
We’ve all been in that position where we encounter a financial emergency. In most examples of these emergencies, we end up borrowing from friends, family members, or lenders to cover the crisis.
No-one wants to go to their aging parents to borrow money; it’s a shameful experience that leaves many Americans feeling sheepish at their financial position. Opening a separate savings account allows you to funnel funds toward future emergencies, without dipping into your primary savings account when things go wrong.
Once you open a primary savings account, you should never make any withdrawals from it. The only time you should withdraw from your savings account is when you reach your savings goal. Depleting your savings account to pay for an emergency expense, will subconsciously de3moralize you from saving again.
You might start to convince yourself that there’s no point saving, as you keep running into emergencies that drain your funds. By opening a separate account for emergencies, you leave your primary savings alone.
Short-Term Savings Account
Setting up another saving account for short-term savings goals helps you avoid the temptation of dipping into your primary savings account. As mentioned, your primary savings account should be a long-term facility. You should avoid withdrawing from this account, no matter the reason.
A short-term account is useful for saving up for lifestyle expenses such as vacations, new furniture for your apartment, seasonal clothing, and necessary health-related costs. Some people refer to short-term savings accounts as “sinking funds.” This strategy allows you to save towards expenses that you would otherwise drawdown from your primary savings account.
Most banks and financial institutions that offer you a savings account require that you have a minimum deposit of $2,000 to start earning interest on your money. However, the amount of interest these financial providers offer is typically meager. In most cases, you’ll struggle to find an account that offers more than 2 or 3-percent interest on your savings.
Therefore, when your primary savings account reaches a level of $3,000 or more, it’s time to consider an investment account. Opening an IRA with your savings allows you to invest up to $6,500 per year into this account. There are two types of IRAs available, a traditional or Roth IRA, and both have different benefits to meet your financial position and future goals.
Most people open an IRA with a financial firm because they offer the highest return on your money. Some IRAs may offer annual interest returns over 7-percent. By building your primary savings account, you’ll have the habit of contributing to your savings every month, and you have something to show for your efforts.
Opening an IRA account helps you to commit to your financial future, and you should have no trouble allocating funds to your IRA every month. If you continue contributing toward your investment account, you’ll be able to take advantage of compound interest on your money. Compound interest accelerates the growth of your savings for retirement.
The Final Word – The Drawback of Multiple Bank Accounts
There is only one real concern for opening multiple banks accounts – the monthly fees. Each account you open will come with an individual set of costs you need to take care of at the end of the month. While bank charges are not heavy-duty costs, they add up over the years.
Before you open multiple accounts, assess your financial situation, and determine whether you need these additional facilities. For instance, opening various checking accounts for you and your partner may not be necessary if you both share the same financial position and outlook. Every person or couples situation is unique, so speak to an advisor at your bank that can help you make prudent decisions with your accounts and your finances.