Ask a Nerd: How Should I Set Up My Bank Accounts?

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The starting points of a banking relationship are your checking accounts and your savings accounts. But just as you might organize your home differently, or even move to a new home, the way you organize your bank accounts may need to change over time.

If you’re like me and you still have accounts at the same bank as your parents, there may have been enough changes in your life to make you wonder if a new bank would suit your needs better.

Let’s determine both the right type of bank and the best combination of accounts and tools for you.

Which bank accounts are for me?

You probably don’t need to think too much about this one. Checking accounts are for spending and savings accounts are for saving money and earning interest.

But you might need additional or specialized accounts, so ask yourself:

  • Do I intend to share finances with anyone? If so, you might want joint accounts.

  • Do I want out of reach savings? Certificates of deposit are a type of savings account that does just that, and they can earn you a high guaranteed rate.

  • Do I want a higher savings rate or lower fees? The offer of online banks high yield savings accounts and high performance CDs, usually with low fees and low open minimums. The best rates are above 3%. These options can be complementary to your main accounts.

How many bank accounts should I have?

The quick answer is: it depends.

The ideal number is “the fewest accounts needed to achieve your goals and sustain your household,” says Derek Brainard, national director of financial education at the nonprofit AccessLex Institute. “Two is the bare minimum, but a lot of people go beyond that just for the sheer sake of organization.”

Multiple deposit accounts can help you budget effectively using an online version of the envelope system, which traditionally involves putting money in envelopes for bills or specific purposes. Instead, you can have a savings account for each goal or a checking account for different types of expenses, which could be much more convenient than cash withdrawals from ATMs and using envelopes.

But this setup may not be for everyone.

“Does multiple accounts reassure you or stress you out?” says Saundra Davis, founder and executive director of Sage Financial Solutions, a nonprofit organization based in the San Francisco Bay Area. Davis has eight bank accounts, including personal and business checking accounts, a savings account for periodic expenses, and a savings account for emergencies (commonly referred to as a emergency fund).

“How we manage our lives should be reflected in how we manage our money,” she says.

What is the right type of bank for me?

It also depends, but you may not know all your options when choose a bank. Let’s break down a few types of banking institutions.

Bank versus credit union

Both offer similar accounts, but banks are for-profit businesses while credit unions are non-profit cooperatives that require membership based on geography or other factors. Banks, especially larger ones, tend to have advanced technologies for online banking. But you might find lower fees and better rates on loans and savings, on average, at a credit union.

Brick and Mortar vs Online Banking

A traditional or brick-and-mortar bank has a network of branches and ATMs as well as in-person assistance to solve urgent problems or to use specialized services, such as cashier’s checks or signing legal documents with a notary. Although an online bank typically lacks locations and the services that come with it, it can offer much higher rates on savings accounts and lower fees than a traditional bank.

Banking in a brokerage house

A brokerage or investment firm can handle both banking and investments if you want that convenience. The equivalent of a company’s bank account is often a cash management account which generally insures funds above the federal deposit insurance limit of $250,000 per account. This insurance allows you to recover funds in the event of a bank failure.

Combination of types

You can have your money in more than one institution and, in fact, you could benefit from it. I have a traditional bank, the same as my parents, but I have cash there mainly to pay credit card bills quickly. In 2015 I opened a high yield savings account that offered a sign-up bonus, then ended up liking the same bank’s checking account for their debit card with no foreign transaction fees .

I could upgrade to being fully online, but what if I need an in-person service that I don’t yet need – like cashing a check that’s over my online banking limit for depositing mobile checks, or speaking with a bank’s loan officer at a branch when applying for a future loan? Keeping both institutions gives me access to different benefits and services.

What banking tools should I use?

Many banks offer features that can help with account management, including alerts to help you budget or detect fraud, and automatic transfers to regularly transfer a portion of your monthly income from checks to saving.

The main benefit of an automatic transfer is to automate your smart decision to save regularly, says Brainard. “The only downside is that it reduces cash flow flexibility.” So make sure you have enough checking balance to pay monthly bills to avoid back and forth transfers.

While automatic transfers have their place, I realized that the Zelle peer-to-peer payment system has a use case that my other Venmo and Cash App transfer apps don’t. Since Zelle is integrated into many banking apps, including my two banks, I signed up my two Zelle accounts (one for each bank) and was able to send almost instant transfers between them for free. This beats the one to three business day wait I used to do for these transfers.

As with similar apps like Venmo, however, Zelle’s main risk is that you usually can’t reverse a transfer once it’s sent, even if you’re sending funds to the wrong person.

Transaction alerts are another tool that can help you budget or detect fraud, and they are sent as emails or text messages. Some common alerts include deposits or withdrawals over a certain amount, balances that fall below a set threshold, and upcoming payment reminders. I have credit card transaction alerts for almost every purchase in case I spot one that I didn’t make.

When should I reassess my banking setup?

Dana Twight, certified financial planner and owner of Seattle-based Twight Financial Education, recommends evaluating your banking setup every two to three years. When your income changes, your needs may change.

Other reasons for changing banks or accounts may include:

  • Having a major life event. Getting married can mean opening joint accounts, and having or adopting a child can mean opening new accounts. Getting a mortgage or starting a business can lead you to a new bank or credit union with cheaper loans than your current bank.

  • A bank that no longer meets your needs. A bank may start charging fees to an account or customer support is not helping you with serious issues.

  • Wanting to support an institution based on your values. Some banks and credit unions, such as Black owned Where Spanish-American ownership banks, play a crucial role in their communities and advocate for social change.

“Doing business with a black-owned bank is important to me, but they don’t have the same backbone and infrastructure as a big bank,” Davis says. “I know I pay a fee every month to put my money there, and I’m doing this because it matters to me.”

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