It’s common knowledge, at least in the U.S., that you should have a bank account to keep your money in a safe, secure place. Having multiple bank accounts can help you keep things separate, making it easier to keep track of your financials. Today, with more people working online and being paid through direct deposit or a service like PayPal, bank accounts are more essential than ever.
Even after you open your first bank account, though, you can probably still improve your overall banking strategy. The digital age has brought us high-yield online savings accounts, allowing people to stash their savings in a separate account that is insulated from their daily spending.
Many experts recommend taking things even further. Why not have three or even four bank accounts? If you are familiar with the budget envelope method, this is sort of a variation of that. If you seldom use paper money these days, having multiple accounts allows you to separate your budg
Two Accounts: Musts vs. Shoulds and Coulds
If you can’t fathom having a multitude of bank accounts, or perhaps you want to ease your way in, one way to do so is with two accounts. Keep in mind that with this setup, you should still have a separate, third account for savings. But the idea here is to separate your necessary expenses from the ones that are more discretionary. By doing so, you can limit how much you allow yourself to spend on things that are merely wants.
“In this type of set up, you can have enough directly deposited from your paycheck into your Musts to pay your monthly bills, while the rest has more flexibility and goes into a second account,” says Jay Zigmont, CFP and founder of Learn, Live, Plan.
Yours, Mine, and Ours
If you have a spouse or a partner, it can be tricky to navigate whether your finances should be combined or if you should just keep them separate. But if you don’t like the idea of keeping everything totally combined or completely separate, there may be a middle ground.
“For example, some couples have a yours, mine, and ours approach to finances,” says Zigmont. “Each person has their own account for personal spending, with a joint account for everything else.” This makes sense, especially since you likely have several expenses that are constant, such as rent or a mortgage, utilities, and so on.
If you are ready for something that is a little more complex, yet still manageable, you can consider a four-account strategy. With this setup, you will have separate accounts for the following: the essentials, lifestyle, savings, and goal savings.
1. The Essentials
The essentials are the things we mentioned earlier — those monthly expenses that don’t change, like rent or a mortgage, car payments, insurance, etc. “Keep your first checking account for monthly expenses only, and be sure to keep an eye out on the balance to meet said expenses,” says Anna-Sofia Coulson, digital marketing executive at Pave.
Coulson notes that you shouldn’t use this account for anything else. Anything that isn’t a regular, monthly expense goes to the lifestyle account.
Your lifestyle account covers anything that isn’t a regular, monthly expense. Hence, these expenses will be more variable and are sometimes referred to as “entertainment” or “for fun” expenses. “Use it for funding weekend entertainment and meals at restaurants or those pilates classes,” Coulson says. “Since this account is primarily for spending, feel free to attach a debit card to the account for daily use.”
While it could be tempting to allocate all of the money not in your essentials account to your lifestyle account, it’s also important to build your savings. In fact, you can even have two savings accounts, where the first is for short-term savings or for emergencies. “This money should only be touched in the case of unexpected emergencies, such as loss of a job or a car breakdown — this account is not for entertainment purposes,” Coulson says.
4. Goal Savings
The first savings account is for covering expenses in a major pinch. But it can get very messy if you are using the same savings account for something you want to eventually purchase. “This account will have money stashed away for personal goals of yours, such as buying a car, a home or simply flying across the world or paying for your wedding,” Coulson says.
The difference here is that these are things you know you want to eventually buy, but they are expensive. That’s different from your emergency fund, which covers unexpected costs in the short term. And your bank may even help you out with these accounts, according to Coulson. “Depending on your bank, you can even take advantage of certain savings account perks to save up for your personal goals faster or track how much money you have left to save.”