How many bank accounts should you have? Two — a checking account and a savings account? Only one — at a bank that does both? How about five?
I’ve found that using several bank accounts can make it easier to budget and spend less. Yes, maintaining several accounts requires a bit of logistics. But thanks to the proliferation of free online banks, it doesn’t have to cost anything.
How people manage their personal cash flow has always interested me. Some married couples commingle every dollar. (“What’s mine is yours.”) Meanwhile, others keep separate accounts. Two septuagenarians I know – married 40 years – pay bills like 20-something roommates.
Then again, some people keep one checking account for everything. (We hope they have a savings account, too!) But I also know a guy who has no fewer than four checking accounts. He carries the four debit cards in his wallet and uses them for different things.
The right number and mix of bank accounts for you is a personal decision. Here, I’m going to show you two different ways to structure your banking with more than one account. These strategies may help you automate your cash flow, stay on budget, and — in the end — save more money.
What’s Ahead:
How I manage my money
My banking setup is straightforward. I don’t make any claim that it’s the best structure. But it’s worked for me, with only slight variations, for more than 20 years.
My accounts
I have three checking accounts, two savings accounts, and three credit cards. (I have other credit cards open, but I only use three on the regular.) All non-business accounts are joint accounts with my wife. I am intentionally omitting investing accounts.
These are my bank accounts:
- Business checking account.
- Primary spending account (checking).
- Reserve spending account (checking).
- Emergency fund savings account.
- Reserve savings account.
- Business credit card.
- Travel rewards credit card.
- Cashback credit card.
The business checking account
I’ve been self-employed for almost 10 years. All my income first hits my business checking account.
It makes sense to have a business checking account if you earn any kind of self-employment income. It doesn’t matter if it’s from running your own business or just some occasional freelance work. For a sole-proprietorship or single-member LLC, keeping your business receipts and expenses in a separate account isn’t necessary, but it’s good financial hygiene. It makes taxes easier. And if you have an LLC, it helps preserve the liability protection that business structure gives you.
Each month, I look at my business profits. Of course, I set some aside to reinvest in the business. The rest I sweep into either my reserve savings account or directly to investment accounts.
Opening a business checking account has gotten easier in the past few years thanks to a few banks that allow you to quickly open an account entirely online. Bluevine provides free everyday business banking and pays 1.5% APY on balances up to $100,000. Accountholders just have to meet one of the following monthly eligibility requirements (effective May 1, 2022) to qualify:
- Spend $500 per month with their Bluevine Business Debit Mastercard®.
- Receive $2,500 per month in customer payments into their Bluevine Business Checking account via ACH, wire transfer, mobile check deposit, or directly from their merchant payment processing provider.
I also like the LendingClub Tailored Business Checking account, which pays 1% cash back on certain debit card purchases.
The reserve savings account
My reserve savings account is a “catch-all” account. It holds money I’m saving for spending goals like vacations but also money I haven’t yet allocated.
I draw my spending money from this account via automatic transfer every two weeks. My “paycheck” goes into my primary spending account.
I put my business income into this account, not my spending account. For one, I want to earn interest on any money I don’t immediately need to spend. But I also don’t want to keep more money than necessary in a checking account that has a debit card attached to it. More on that in a minute.
The emergency fund
My emergency fund is a separate savings account (at a different bank). I funded it a long time ago and — knock on wood — have not needed it. So, it sits idle, earning its small amount of interest. In an emergency, I could transfer money from it to my primary spending account. I would then replenish the emergency fund from my reserve savings account.
Having more than one savings account isn’t necessary, but there are some advantages. It helps you keep your pots of money different. There’s nothing stopping me from robbing my emergency fund account to make up a shortfall in my vacation fund. But the fact I keep these monies in separate accounts makes it psychologically harder to do.
Whether you use the same bank or different banks for your reserve savings and emergency fund accounts is up to you, but I do recommend you use two separate accounts. I like the Discover Online Savings Account where you can earn 1.10% APY, but any one of these best high yield savings accounts will work.
The primary spending account
My primary spending account is a basic free checking account. You could use any number of banks or credit unions for a spending account. And if you never have to deposit cash into this kind of account – there are a number of great online checking account options like
- OnJuno where your funds will earn a 1.20% Bonus on deposits up to $5,000 (subject to change at OnJuno’s discretion). You’ll also earn 5% cash back when you spend with five eligible merchants that you choose (on up to $500 in spending with the Basic account and $3,000 with the Metal Membership).
- Chime which has no monthly fees, a 0.50% Annual Percentage Yield (APY) - 8x the national average! And you can get paid up to two days early when you direct deposit your paycheck into their accounts. Early access to direct deposit funds depends on payer.
- Aspiration where you can earn up to 5.00% APY (Variable) with Aspiration Plus. With the Spend & Save account, you’ll earn a $150 bonus when you spend $1,000 within 60 days of account opening; bump that up to $200 with the Aspiration Plus account.
Chime Disclosure - Chime is a financial technology company, not a bank. Banking services and debit card provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC.
1Chime cannot guarantee when files are sent by the IRS and funds can be made available.
^Early access to direct deposit funds depends on payer
I recommend keeping as little money as possible in your spending account unless there’s a good reason to deposit more. Personally, I do keep a minimum balance in this account because it earns me a teensy bit of interest and unlimited ATM fee rebates. Above that minimum balance, I try to deposit only what I want to spend in a month.
I use this account to pay my utilities, insurance bills, fund my Venmo/Cash App, write checks (yes, I still do that, lol) and pay my personal credit card bills.
The credit cards
Now, I pay for almost everything with one of two rewards credit cards. I have the Chase Sapphire Reserve® for travel and dining (alas it has not gotten much use in 2020). For everything else, I use my Fidelity Rewards Visa card, which puts cash back right into my Fidelity brokerage account. If you want a no-annual-fee card that earns unlimited cash back you can spend, save, or apply towards your card balance, check out Chase Freedom Unlimited® which provides 1.5% cash back on all purchases and 0% Intro APR on Purchases for 15 months and 0% Intro APR on Balance Transfers for 15 months.
As long as there is not a fee to do so, I use credit cards for everything I can — from $1 coffees to cars (when the dealer allows it). I pay the balances in full each month. I haven’t paid a nickel of credit card interest in over 12 years, and I plan to keep it that way.
I use credit cards for the rewards, yes, but also security. The credit card issuer serves as a buffer between my money and merchants in the event of fraud or dispute.
But here’s the thing: using credit cards for daily purchases makes it difficult to manage your spending closely.
It is not a good idea if you’re on a tight budget. It also may not be advisable if you have a tendency to let your spending get away from you.
In general, we tend to spend more with credit cards than we do with cash (or even debit cards). There’s some physical pain when parting with cash. And with a debit card, you must account for the money coming out of your account in real time.
Although I don’t like a lot of things about debit cards, I admit the only foolproof ways to avoid overspending is to use cash or a debit card tied to a checking account with a finite amount of money.
This is why it’s important to have at least one spending account, not just a checking account. The difference is that a spending account only contains as much money as you want to spend in a week or a month. By contrast, a checking account has money flowing in and out of it all the time regardless of whether you’re intending to spend it.
The reserve spending account
My reserve spending account is a second checking account linked to my reserve spending account and primary checking account. I use this account to pay for things that come up less than once a month.
For me, this includes things like:
- Property taxes (twice a year).
- Auto insurance (twice a year).
- Life insurance (twice a year).
- Home insurance (once a year).
- Income tax estimates (quarterly).
- Propane (heat) (irregular, but more in winter).
- Snow plowing (winter only).
- Routine vet bills for four pets.
I’m sure I’m forgetting a few things. But what I do is figure out how much each expense works out to monthly. I then transfer that amount from my reserve savings account each month into the reserve spending account. I then pay the amounts from the reserve spending account when due.
For your reserve spending account, you could use any of the best online checking accounts including the accounts I previously recommended – Chime and Aspiration. Personally, I find it helpful to have your reserve spending account at the same bank as your reserve savings accounts for instant transfers back and forth. For example, if you choose the Discover Online Savings Account for your reserve savings, the Discover Cashback Debit account might make the perfect choice for your reserve spending account.
Another multiple bank account system
Michael Goldman is a friend of mine and financial planner here in Maine who invented his own cashflow system that I’ve mentioned here on Money Under 30 before.
It’s slightly more involved than my system and is especially excellent if you do not use credit cards for regular spending.
In Michael’s system, you have a minimum of five accounts that he calls Earn, Spend, Reserve, Fun, and Freedom.
The system is similar to my own but works slightly differently.
- The earn account – your income is first deposited into your earn account (similar to my reserve saving account). From there it is allocated between all the other accounts.
- The spend account – just like my primary spending account – is obvious and used for monthly routine spending.
- The reserve account is just like my reserve checking account and is used to store money that will be spent on less than a weekly basis.
- The fun account is used to save for “fun” goals like vacations, experiences, and splurges. In this system, it’s psychologically important to actually keep this fun money in its own account. For one, you can only splurge with “fun” money, not money from other accounts. Also, if you’ve ever had trouble treating yourself because you’re overly focused on saving – having a designated fun account should make it easier to treat yourself. Remember, spending some of your money today on things you enjoy is healthy!
- Freedom accounts The freedom “account” is actually a category of accents that is usually broken down into an emergency fund, retirement accounts, debt payoff, and other savings. Freedom accounts are all the other things that you save for: the emergency fund, retirement, kids’ college, etc. The money you save in these accounts “buys units of freedom” in the future.
Which bank accounts are right for you?
At a minimum, everyone should have at least two bank accounts – a checking account and a savings account. But I also believe most people are well-served with two savings accounts. One account for your emergency fund that you only touch in true emergencies. And another account where you save for goals and reserve money to pay for nonmonthly recurring expenses.
If you own a business or receive freelance income, you’ll obviously need a business checking account, too.
Beyond that, you need to ask yourself: Could adding an additional bank account or two help me save?
Two checking accounts – one for routine daily spending and another for splurges or “fun” money makes a lot of sense. It’s a great way to manage your spending. Bonus points if you deposit your income into a savings account and then transfer only the money you need into spending account. Most of us do this the other way around – we have our paychecks deposited into checking and then transfer some money to savings.
Some online savings banks including CIT Savings Builder and Discover Online Savings Account allow customers to open as many savings accounts as they want with a few clicks of your mouse. That can be useful for organizing your funds without keeping track of more accounts at different banks.
On the other hand, hybrid financial apps like Chime, Aspiration, and Acorns offer access to both spending and saving or investing accounts in one. One of these financial apps might be the right fit if you’re looking to keep things simple. Alternately, you might use one in conjunction with a traditional savings account or two to create the perfect multiple-account system for you.
Summary
If you are having trouble managing your spending, you might want to take a look at the bank accounts that you have open first.
Are they serving you well? Do you have enough of them? And how are you using them?
Whether you use my multiple bank account system, or one like that of a respected financial advisor, like my friend Michael Goldman, knowing how your money flows is an important first step in managing your finances.
And then, of course, you take off from there.
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