Simplicity, so said Leonardo da Vinci, is the ultimate sophistication. And while you may think that having multiple bank accounts is the opposite of simplicity, it can be a powerful way to help you achieve your financial goals. The trick is to have a banking strategy that, while both easy to visualize and maintain, nevertheless maximizes your chance of success. In a word, simple. And yet, sophisticated.
Presumably you already have a checking account, where your paycheck and other regular sources of income is deposited. In addition, hopefully you have established an emergency fund separate from your checking account. If not now, certainly in the future this account will have a fairly large balance, equal to at least 3 months of your expenses. If you have not yet reached your desired emergency fund balance, set up an automatic transfer to this account. Because it is earmarked for emergencies, it should reside out of daily sight and largely out of mind. A high-yield FDIC-insured online savings account is the perfect home for your emergency savings. There are numerous sites online where you can compare rates and terms.
So that now makes two accounts: a regular checking account and an online savings account for emergency savings.
Now consider adding a third account to the mix: a sinking fund. This is a different savings account where you will house funds that you will definitely need in the near term for large-ish expected expenses…annual or semi-annual insurance premiums, new car tires, a trip to the dentist, etc. Think about the likely expenses you will encounter over the coming year and determine how much you need to save to meet them. Then, automate a regular deposit to this account from your checking account based on this total. The balance in this account will rise and fall as you spend for the expenses you anticipated. For that reason, it is not terribly important that you achieve the “best” interest rate. For simplicity, you may want to keep this account at the same bank as your checking account. The value of having a sinking fund account is that it makes the distinction very clear between true emergencies (a job loss, a medical emergency) and infrequent, but not totally unexpected, expenses. It gives you a place to anticipate and plan for these expenses and not wreck your carefully nurtured weekly budget.
Simple…and yet sophisticated!