Wednesday, June 22, 2011

Savings Accounts: Pitfalls of having too many

Savings accounts are great. Having savings in them is even better. But having too many savings account is not only a nightmare but can possibly be doing yourself a disservice.

Disadvantages of having multiple savings accounts with small amounts:
  • Fees may be payable on each of those accounts
  • Harder to manage and efficiently rotate into higher interest accounts
  • Tax time can be a nightmare when trying to calculate how much you earnt in the financial year across the multiple accounts
  • You may not qualify for higher interest returns if you don't meet minimum establishment/investment amounts
How can anyone possibly be tempted to open separate savings accounts for categories such as holiday, house deposit/down payment, car, taxes, education and lump sum bills to name a few? Just trying to keep on top of multiple accounts can be accompanied by a headache.

The biggest problem that you encounter due to separating your savings into separate accounts is that you may not qualify for higher interest accounts that require a minimum $X amount of money to establish such as $5000 or $10,000. Some term deposits also have different rates depending on how much funds you have. Usually you can qualify and request higher interest with the more funds that you have.

You don't have to open up separate accounts for all these categories. You could simply work out how much you need to save across each of those categories and then ensure that those amounts are direct debited/transferred out of your salary and deposited into a single, high interest savings account. Simple, easy and fuss free. After that is sorted, you can start negotiating with the bank for the highest advertised interest rate or you can move them to different financial institutions if the rates are more competitive elsewhere.

The Envelope Budgeting Method Should Be Called 'The Flawed Method'

And the envelope budgeting method? Where you put certain amounts into envelopes labelled electricity, water, gas etc? I remember when I turned 18, I told my parents that I was moving out to relocate myself closer to Uni and would survive just fine on my own. In the panic that ensued realising that I knew nothing about moving out, I read piles and piles of books on personal finance, managing my finances, how to budget, my rights as a tenant/renter, what my expected housing, living and entertainment costs were going to be and all the other expenses involved with the student Uni life.

I even bought enough non-perishable food to fill up a 70 litre box. Oodles of cans, tins, drinks, biscuits, chips, snacks and anything I could think of. The box was so large that it wouldn't fit in the kitchen so it had to be stored in my bedroom. That's how silly I was back then ;p

Once I moved out, the first method I tried was the envelope method. I look back fondly on my introduction into the big, not-so-bad world of supporting myself. Every time I got paid, I diligently withdrew money from my account and stashed them into the appropriate envelopes. When the bills came, I used those funds from the envelope. It was a bit stupid really. Since I'm not a crazy spendthrift I didn't need to use the envelopes at all. Instead, I had dudded myself out of earning interest. Fortunately I realised that rather quickly, tore up the envelopes and instead rotated my funds into higher interest savings accounts and term deposits whenever I had excess.

The Envelope Budgeting Method is really flawed if you have no problems with managing your finance. If you do, maybe it'll help but essentially you're not earning any interest on those funds that are stashed in those envelopes.

Chasing the high interest and opening multiple bank accounts

A few years ago, I was on the war path for higher interest. High rates were advertised in all the business newspapers so I started opening up one account after the other. Whichever account had the highest advertised interest, I would rotate those funds into the appropriate bank. At the end of the financial year, tax time would arrive and I'd find myself buried neck deep in bank statements and interest from piles of term deposits, savings accounts and online savings accounts. It was an absolute nightmare >.<

Now that I'm older and wiser (so I like to think), instead a simple call to the financial institution requesting a more competitive rate to match other banks will suffice. They will usually match or give me a more competitive rate if I ask for it. It's so much simpler than opening up new accounts frequently, transferring funds around and completing tons of paperwork.

Who should have multiple savings accounts?

If you're really bad with your personal finance and can't resist maxing out your credit cards, maybe having multiple accounts could work for you. Some people just like to compartmentalise everything in their life to feel a sense of control and that's fine if you're like that. It's important to know your own psychological behaviour in relation to money so that you can find something that works for you.

Afterall, some people out there are still stashing their life savings under their mattresses and I'm not even going to explore the pitfalls with that particular option because there's far too many.

1 comment:

  1. This can have its advantages and disadvantages, as if you were able to lock in on a high rate and rates across the board began to fall, you could still enjoy the high rates for the life of the bond.