How many accounts should I have?

Having too many accounts might get complicated. There are some people who constantly hop among credit card offerings maximizing miles, points and cash backs. Others try every new high-yielding cash account or robo-advisor offering. Yet, unless this is not your dearest hobby and you do not want to turn it into almost a full-time job, we are advocating for simplicity. At the end of the day, it’s not the several points of cash back that will build your wealth. And it can hurt you if distracts your attention from the long-term savings strategy.

So, how many accounts is enough? As with all the financial planning questions, the answer is “it depends” – you can get away with 3 or might need 10. The rule of thumb is to have separate accounts for:

  • Spending
  • Emergency and short-term savings
  • Medium and long-term goals.

Spending

Checking account: you need one – this is the main account where your payroll goes and where you pay your monthly recurring payments from.

Credit card account: several. Your first credit card account is likely not the best one or the most convenient one, yet you should not close it if the credit score is important for you. It adds to the length of your credit history (accounts opened 7+ years ago are the best ones to keep). Make an occasional payment from this card so that it does not drop from your credit report (and remember to pay it back during the statement cycle to avoid interest). However, keep the vast majority of your expenses consolidated on a single credit card. Chose the credit card with the financial institution you like that gives a highest cash back. This way you can track how much you spend. Even if you are not a fan of budgeting, it’s a good habit to check your spending patterns from time to time – by doing so, you can spot potential lifestyle creep.

Emergency fund

This account should be separate from you checking accounts. You can open a high-yielding cash savings account for these purposes. Savings accounts can have a limit on a number of withdrawals per month. Yet, they are perfectly suitable to build an emergency cushion and will yield you some return (the returns are typically within 1.5-1.8% range; it will not make you rich but it’s better than zero).

Short-term savings goals

These are the goals that you plan to achieve within 1-3 years – the most common goal is a down-payment for a house. You can use the same high-yielding cash savings account (banks like Ally Bank allow to use different buckets within one account so that you can keep track of the progress towards each goal) or open a separate account per goal.

Medium and long-term savings goal

These are the goals with 3+ years’ time horizon. The rule of thumb is to maximize the benefits of the tax advantaged accounts: 401K or IRA for retirement and 529 accounts for kids’ education.

If you qualify for the Health Savings Account (HSA) – use it. With the triple+ tax benefits, it can be a great vehicle to save for your medical expenses in retirement.

Finally, a brokerage account is an account where you can be saving and investing for other medium – term goals (the ones that are further away than 3-5 years, but before retirement).