“How many bank accounts should I have?” is the first question people ask when they decide to get their finances in order. However, financial success does not come from the number of bank accounts you hold. In fact, without any organization, having too many bank accounts can be confusing and even cost you.
On the other hand, organizing your bank accounts can help you quit living paycheck to paycheck, pay off debt quicker, and maintain better financial records.
To know what types of accounts you need and how many, the first thing you need to do is determine your personal financial goals. Next, you need to find the right mix of bank accounts that you can align your goals with.
Types of bank accounts and the goals they help you achieve:
Checking Account
→ A basic account where your paycheck is deposited.
→ Primarily used for day-to-day financial transactions and bill payments.
→ Fastest, most convenient access to your cash.
Savings Accounts
→ A basic account to store your savings, offered by a bank or a credit union.
→ You earn a little interest on the parked funds (Online savings accounts have higher interest rates).
→ You can withdraw the money if you need to but the number of withdrawals is limited.
Certificate of deposit (CD) is another type of savings account that has a higher interest rate. The catch here, however, is that your money is locked for the term you select.
Assigning a savings account for each of your savings goals helps you stay on track. There are multiple options available:
→ Emergency fund savings account
→ Giving fund savings account
→ Sinking fund savings account
→ House down payment savings account
→ Accounts for short term goals (like a wedding or a vacation)
Retirement Investment Accounts
There are three types:
i) 401(k)
→ An employer-sponsored investment.
→ Employees get a tax break on any money they put in it for retirement.
→ Some employers will even match your contributions.
→ Money is automatically deducted from your paycheck and invested into funds that you choose in advance.
ii) 403(b) or 457(b)
→ 403(b) is a retirement plan available to teachers, nurses, doctors, and other employees working in tax-exempt institutions such as non-profits and public schools.
→ 457(b) is a retirement plan available to police officers, firefighters, and other state and local government employees.
→ Investment options include mutual funds and annuities.
iii) Individual retirement account (IRA)
→ Folks working in organizations where the employer does not offer a 401(k) will want to set up an IRA account.
→ Also offers tax advantages.
→ Wide range of investment options so you can choose the optimal mix for your requirements.
Non-Retirement Investment Account
→ Investment accounts put your money to work to help you achieve long-term goals.
→ You can access your funds at any time without being penalized.
→ You can save beyond your 401(k) or IRA.
College Saving (529b) / Custodial Accounts
→ Help you save for your child’s education. Withdrawals to pay for school expenses are tax-free.
→ Funds can go towards books, school supplies, tuition, and room and board.
→ Valid for expenses starting from elementary school through college.