The overwhelming majority of people in the United States have at least one bank account and this is a statistic that remains true across all age groups. According to research by the Federal Deposit Insurance Corporation (FDIC) the number of households in the United States without a bank account (“unbanked households” has been steadily declining since 2011 from 8.2% to 5.4% in 2019.
However, while consumers frequently wonder what the optimal number is of other financial products, most commonly credit cards, little thought gets put into addressing the right number of bank accounts. How many bank accounts should a person ideally have? In the following paragraphs we’ll answer this question and provide some tips and considerations to help you find the right bank accounts.
Checking vs. Savings Accounts, or Both?
Bank accounts are useful for two reasons. First, they provide a secure place that consumers can store their hard-earned money. Second, they help consumers execute and facilitate everyday transactions. While it might not seem like it, these are two distinct purposes that are most optimally served by the two main bank account types.
In fact, we’d argue that trying to decide between a Checking vs. Savings account misses this exact point. Our view is that every consumer should have both a checking and a savings account.
A savings account serves the first purpose: keeping your money safe. With interest rates now on the rise, you will also be able to start earning some return on these funds for the first time in many years.
A checking account should be used for transactional purposes such as bill payments, recurring payments, mortgage and credit card bill payments, everyday debit card transactions and cash withdrawals.
While there are checking accounts that also pay interest, there’s usually a catch in the form of high minimum balance requirements in order to earn interest, and at times monthly fees if you fail to meet the balance requirements.
What to look for in a Savings Account?
The two most important criteria when selecting a savings account are the interest rate the account pays and the activity limitations. As noted earlier, while interest rates have been very low for many years, they are on the verge of rising, potentially significantly, given the Federal Reserve’s commentary and other indications from financial markets.
Larger banks such as Chase Bank and Bank of America tend to offer lower interest rates than less established financial institutions. For example, Chase Bank currently offers its savings account holders an interest rate of only 0.01% and this is regardless of the total account balance.
By contrast, Ally Bank – a large but comparatively smaller and lesser-known bank – offers its customers 0.50%! To put this in perspective, if you had $10,000 in savings throughout the year, one account would have earned $50 of income (Ally customers) while the other would have earned just $1.
Because savings accounts are interest-bearing by design, banks implement restrictions around the number of transactions (primarily withdrawals) that account holders can make. While one might think this doesn’t matter as much given the nature of the account, its always important to look for flexibility. For example, it is generally a good idea to link savings and checking accounts for overdraft protection.
However, if your checking account is about to be overdrawn and your bank transfers funds from your checking account, that would be considered a transaction against your monthly transaction limit. Once you exceed your limit you start incurring charges from the bank.
So, it’s recommended to look for savings accounts that have generous transaction limits, because you never know when you might need it.
What to look for in a Checking Account?
Unlike savings accounts, checking accounts are transactional which from the bank’s perspective means that their balances are volatile and at times unpredictable. Because of this, banks will often enact minimum balance requirements to counteract these factors.
In addition, they have a host of charges tied to the transactions you make with the account such as ATM fees, cashier’s checks, money orders and wire transfers. So, with all of that said, it should come as no surprise that our view is that you prioritize accounts with minimal fees when choosing a checking account.
The simple reality is that it just doesn’t make sense to pay a lot for using money you’ve earned in the first place. Seek out accounts that have no (or very low) monthly payments and freebies such as unlimited ATM rebates.
Don’t Be Afraid To Be Opportunistic
It’s a good idea to have one savings account and one checking account – that really is enough for most people in terms of being able to successfully manage your financial life. However, there will be situations where opening a new account could be to your advantage.
A frequent example are incentives banks or credit unions offer during the mortgage origination process. If you’re shopping for a mortgage with a bank or credit union that you don’t currently have a checking or savings account with, you will typically be charged a higher mortgage rate. In effect, banks use products like mortgages as a tool to attract new checking and savings account customers.
If you can save 0.50% on your mortgage rate by opening a new checking account with your lender, it’s very likely going to be a good financial decision given the size and term of the typical mortgage.
You can always close the account in the future, and unlike credit cards and other debt, there is minimal impact to your credit score from opening and closing savings and checking accounts.