We all know the traditional banking model: one checking account and one savings account to cover all of your needs. Back when everyone received a physical paycheck and banking was done in person, this model made a lot of sense: who wants to run to the bank every week to move their money around? Not me! Fortunately, with the proliferation of online banking, it is easier than ever to manage multiple accounts. This has allowed people to bank in a way that makes sense for their lives, and as it turns out, having all of your money lumped together in one place is not necessarily the most effective strategy.
When all of your cash is in just one or two accounts, it’s difficult to know how much you need to keep for emergencies versus how much you could use for an upcoming trip. Luckily, there is an easy solution: set up multiple savings accounts! For example, if you are saving for an emergency fund, a vacation, and a car down payment, you should have three separate savings accounts (ideally high yield savings accounts).
What are the benefits of having multiple savings accounts?
Track your progress
When you have separate accounts for your savings goals, you’ll know exactly how much money you have for each one. You can also easily recognize when you’ve reached a goal and can reroute those monthly savings to your next priority.
Ease your decision-making
If you get an invite to join a friend on an impromptu trip, you can just check the balance of your travel fund to know whether you can say yes.
Reduce uncertainty
Separate accounts are helpful if you have a hard time parting with your savings for fear that you won’t have enough in case of an emergency. With a separate car fund and emergency fund, you know that buying the car you’ve saved up for won’t affect your ability to cover an unexpected expense.
Boost your motivation
Separating out your savings is a great motivational strategy for people who have had trouble balancing saving with satisfying their immediate wants. Having a purpose for each savings account will lead you to question whether you really want to pull from your home fund to pay for a concert when your favorite band comes to town. You can still make that decision, but you’ll know exactly how that impacts your future self.
How to manage multiple savings accounts
Fortunately, managing multiple savings accounts is not as tricky as it sounds. Here are tips for making it as smooth as possible:
Open multiple accounts at one bank
Most banks will allow you to open several separate savings accounts at their institution. Some banks, such as Ally Bank, allow you to create multiple savings “buckets” in one savings account. This can serve the same purpose.
Name your accounts
You can give each savings account or savings bucket a nickname. Get creative and specific!
Transfer the funds back to your checking once you’ve reached your goal and are ready to spend
You’ve reached your goal — now what? When you are ready to pay the down payment on your car or purchase flight tickets, transfer the amount needed from your savings to your checking account. If your accounts are at different banks, this can take 3-5 days, so make sure to plan in advance.
Rename or close accounts once you’ve reached your goal
If you have emptied out an account for its intended purpose, you can rename the account for a new goal or close the account altogether. Don’t worry — opening or closing a bank account does not affect your credit score.
