Just how many bank accounts do we need?

2nd Dec 2022

(This is a reprint of an original blog by my co-writer Elise Horent)

Earning, saving, or spending?
Image by Nattanan Kanchanaprat from Pixabay

Having a strong financial plan is particularly important in alleviating the anxiety that can come from facing an uncertain future. So why do so many of us procrastinate about formulating a clear financial strategy and budget? Perhaps because it requires more effort than maintaining the status quo and may require us to think beyond simplistic calculations and heuristics.

However, once we have sorted out our finances, we are less stressed, have more time to enjoy our money, feel more secure about our savings, and more able to focus on other aspects of our lives. Being financially stable means that we know where our money is, how much we earn and spend, and that we have enough savings to feel confident about facing any future shocks or issues.

Part of achieving this financial stability is planning and organising a financial plan and budget, starting with organising our funds; a way to manage our money that feels natural and makes sense. One way to achieve this is by having separate accounts for important bills (like rent, utilities), another for incidentals (like dining out), and another for ‘rainy day’ or long-term savings.

Yet, it is here that we start to come across cognitive biases, the first of which is the ‘status quo bias’; inherently, humans tend to avoid and delay change whenever we can because it requires more effort than dealing with it. Most of us suspect that keeping all our money (salary, savings, spendings) in just one account is not a great tactic but can’t be bothered to calculate exactly how many accounts we would need to keep everything separate.

In retail banking, the ‘magic number’ of bank accounts is a question widely debated. Some say four accounts is the ideal, others say six. A similar discussion applies in how best to compartmentalise our income, expenditures, and savings. The banks would like us to have more accounts with them, not least because evidence shows that the more products you have with a bank, the less likely you are to switch to a competitor.

But what if we were intrinsically worried about money yet disorganised at the same time? Why stop at four bank accounts? We could decide, (seeing how easy it is to open online bank accounts now), to separate our money into many different activities; one account for shopping, another for going out, another for rent, etc. But this means we would need to set up limits and transfers ourselves and have the self-discipline to stay within the budgets allocated. 

A second issue in addressing our financial plan is how much to allocate to each account; which is where another cognitive bias can come into place, ‘mental accounting’, which is  the way we assign a subjective, rather than objective value to money. Before setting clear targets for each account, we need to have an honest and objective picture of what we spend on each category, and how much it is possible for us to save. If we start by being too strict or too lax on ourselves, chances are we will abandon the plan out of frustration in failing to meet goals. Those who feel the most secure are those who are the most focussed of what’s really happening, without over/underestimating reality. 

Many banks and accounts are broadly similar, but while different financial strategies can be helpful, depending on the type of personality we have, it is vital to pick one that works for us. Many experts claim we should have between four and six bank accounts, yet the average number of accounts held in the same bank tends to be between one and three.

Whatever the final number we end up with, once we have determined our strategy, set financial objectives, and put in place a plan that we can stick to, we can finally relax and learn to make most of the money we have. 

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