Multiple Bank Accounts might be hurting you. Here’s how you can change it.
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four bestselling books on Personal Finance.
02 Jun, 2017
Consider this scenario.
Rohit Rane, a 46-year-old IT professional has held numerous jobs over the years. Each time he changed jobs, the employer opened a new account for him with their bank. Consequently, he became the holder of more than four bank accounts. Answering a simple question about the balance in an account posed by his wife turns into a treasure hunt through the piles of papers on his desk. The situation is fraught but the most crushing aspect is the prevalence of a negative balance in some of the accounts due to non-maintenance of the minimum balance. While he wishes to close some of the accounts, he lacks the time or patience to go to a branch, wait there and get the work done. This unfortunately is a very common story for many professionals.
The issue gets further complicated for Rohit because he uses a different account for every different purpose; one account to pay his credit card bills, another for home loan Equated Monthly Installments (EMIs), a third for investments and insurance requirements, and pays for his living expenses from the fourth account. Deposits and transfers need to be made on an ongoing basis to meet minimum balances in these four accounts and this leads to a lot of confusion. The circumstance is tricky but Mr. Rane has no one to blame except himself for it.
When it comes to money, having more of it seems better, but when looking for a place to park that money, the lesser the confusion, the better. Of course, it is important to have more than one bank account. This is mainly because the money you deposit in banks is insured to the tune of just Rs. 1 lakh per account. So, in case of any unforeseen circumstances, your bank was to go bust, you would be in serious trouble. To address this risk, a person should hold at least two bank accounts at a single time. Also, for a business person, it is ideal for professional accounts to be kept separate from personal ones. This makes record keeping easier and ensures that during tax season you can comfortably segregate personal and professional expenses.
How many accounts should a person ideally have?
To answer this question, we first need to understand the various avenues or transactions that would involve a bank account. Basically, there are two types:
- Inflows; which include salary, interest, dividend, gifts, rental income or lottery.
- Outflows; which include loan payments, credit card payments, lifestyle expenses, gifts, investments, and insurance payments.
Generally, the kind of accounts people hold are:
- Salary account
- Salary account/s through previous employer
- Dormant accounts
- Home loan attached to an account
- PPF account (Generally with a nationalized bank)
- Current account, if you are a business owner
- Accounts in the names of their spouses and children
Taking into consideration the above-mentioned data and applying it to a double income family, there would be at least six to eight different accounts within the family. Keeping a track of them all and managing them competently is a complex affair. The intricacy of the situation is felt more when the information must be collated and handed over to a chartered accountant or financial advisor.
To cut down on clutter, it is best to have two accounts and take the following steps to segregate the money.
- We can all pretty much agree on the fact that the salary account is the most important one. If your employer does not provide one, designate one account as your salary or inflow account. All inflows whether salary, dividends, interest should go into this account. (It is likely that you have some fixed deposits in other banks and hence, some interest coming there which is easy to manage). Ensure that all your home loan EMI, insurance payments and investments are made from this account. You can set up an auto-debit for these transactions from this account itself. Of course, many people have home loans and could have a separate bank account with the home loan account.
Having one account for your inflows and another for your outflows makes both, yours and your chartered accountant’s life much easier.
- Have a separate account for all your living expenses. You could even opt for a joint account with your spouse that can be utilised for all bill and credit card payments (including telephone, property maintenance, cable, food, groceries, petrol, vacation etc.)
- You could do it the other way around as well; where you pay all the expenses from your salary account and investments and your insurance and loan payments from another account. Since home or car Loan EMIs, insurance premiums and investments are well-known in advance, you can be pretty sure of the amount that you need to transfer from your salary account.
It is important to remember that crores of rupees go unclaimed every year from forgotten or dormant accounts. These are mostly because many people don’t use these kind of accounts for years together. As it’s said, too many cooks spoil the broth. Similarly, too many accounts can spoil your finances. Hence, it is best if you have two or at best, three bank accounts to manage your finances.