Using multiple bank accounts

Question

One thing I've always struggled with finance-wise is how to manage higher-level budget categories across a limited number of accounts. For instance, I currently maintain the following types of accounts:

1. Checking account - bills and everyday expenses
2. Savings account - Emergency fund/anything else
3. Retirement account (401(k))
4. Personal brokerage account (for small investments; comes with a checking account)

I don't really like how this is setup, though. In my mind, it would make more sense to separate things according to usage. Consider this:

1. Checking 1 - bills
2. Checking 2 - everyday expenses (gas, food, etc.)
3. Savings 1 - Emergency fund (grow to 6-12 months living expense)
4. Savings 2 - Vacation/"rainy day" fund
5. Savings 3 - "Big Expenses" fund (new cars, house down-payments, etc.)
6. Retirement/investment accounts

Perhaps this is naive (and specific to my financial plans), but I think it represents what I'm going for: a way to manage my money in broad categories. My desire is really two-fold:

1. Visibility - I feel like I'm reaching goals by seeing these categories grow
2. Accountability - I may be less tempted to pull from one category to finance another (a big problem I have now).

Obviously, I've used accounting and budgeting software to manage money at a granular level (and still will). I certainly wouldn't extrapolate this approach to having very tiny accounts for every budget category. However, I feel as though some basic compartmentalization would be useful for the reasons outlined above.

Am I way off? What are the pitfalls to this approach? Are there any advantages/ways of going about this that I have missed?

Answer 1

There is nothing conceptually wrong with it. If you like it that way, go ahead.

The only thing to watch out for is bank policies that effectively penalize having many small accounts. For instance, some banks charge you a fee for checking accounts with a balance below a certain minimum, but will waive the fees for accounts with a higher balance. You may be able to avoid such fees by judicious management of your funds (or by switching to a different bank), but it's something to be aware of. (The interest rates on savings accounts also often vary with the balance, making many small balances less efficient than one big balance. However, right now, at least in the US, interest rates on savings accounts are so low that the difference here is likely to be minimal.)

Answer 2

I live near historic Concord, Massachusetts, and frequently drive past Walden Pond. I'm reminded of Henry David Thoreau's words,

"Simplify, simplify, simplify."

In my opinion, fewer is better. 2 checkbooks? I don't see how that makes budgeting any easier. The normal set of expenses are easily kept as one bucket, one account.

The savings 2&3 accounts can also be combined and tracked if you really want to think of them as separate accounts.

Now, when you talk about 'Retirement' that can be in tax-wise retirement accounts, e.g. 401(k), IRA, etc. or post tax regular brokerage accounts. In our situation, the Schwab non-retirement account was able to handle emergency (as money market funds) along with vacation/rainy day, etc, in CDs of different maturities. As an old person, I remember CDs at 10% or higher, so leaving money in lower interest accounts wasn't good. Cash would go to CDs at 1-5 year maturities to maximize interest, but keep money maturing every 6-9 months.

Even with the goal of simplifying, my wife and I each have a 401(k), an IRA, and a Roth IRA, I also have an inherited Roth, and I manage my teen's Roth and brokerage accounts. That's 9 accounts right there. No way to reduce it.

To wrap it up, I'd go back to the first 4 you listed, and use the #4 checking attached to the broker account to be the emergency fund. Now you're at 3. Any higher granularity can be done with a spreadsheet.

Think of it this way - the day you see the house you love, will you not be so willing to give up that year's vacation?

Answer 3

Spreadsheets are your friend!

I've got:

1. Checking account #1 - normal monthly bills.
2. Checking account #2.
3. Savings account.

Columns in a spreadsheet track my:

1. Auto insurance semi-annual premium
2. Divorce loans, lawyer, etc.
3. Emergency fund
4. Home/appliance repair fund
5. Insurance deductibles
6. Miscellaneous non-monthly bills
7. Property insurance
8. Property tax
9. Vacation

The actual money for those nine funds actually go in a the Second Checking and Savings accounts. Everything's good as long as the spreadsheet sum matches the sum of the two bank balances.