Despite growing mistrust in the banking industry since the 2008 financial crash, we remain steadfastly loyal to our personal banks. So loyal that the Competition and Markets Authority (CMA) found that, in 2016, only 3% of UK residents switched banks. While that doesn’t reveal how many people have multiple bank accounts, it may well suggest that we’re not looking at our banking activities strategically. Having a single bank account makes things simple on the face of it. But is it sensible?
With the financial crash, which included the failure of Northern Rock, and the increase in cybercrime, we know that putting all our eggs in one basket is a bad idea. But there are a variety of reasons why it’s sensible to have multiple bank accounts.
In the UK and across Europe, many bank accounts are free, making opening a new one easy. No matter where you’re located though, having over one bank account could have huge benefits for your finances.
Want to know why? Keep reading and we’ll break it down.
Protect Your Money
Spreading the risk is one of the most sensible things you can do with investing and the same goes for storing your hard-earned money. If you have just one bank account, you leave yourself open to serious problems.
If your financial institution fails, you may lose access to the money you’ve stored with them. While it seems unlikely, the banking industry is changing at a rapid rate and instability can happen, even as stricter regulations are in the works.
In the UK, the Financial Services Compensation Scheme (FSCS) protects your money if a British bank fails. However, they will only protect your finances up to £85,000 in each financial institution.
A financial institution is an entire corporation rather than individual banks. For example, if you have £100,000 in Natwest and the Royal Bank of Scotland (RBS) fails, you’ll only be protected for £85,000 as Natwest is owned by RBS.
If you have split your £100,000 between two accounts, one with Natwest and one with RBS, you will still only get protection on £85,000. This is one reason you do not only need more than one bank account, but you should spread accounts across different parent financial institutions.
Cybercrime is becoming more prevalent around the world, putting banks and your money at risk. In 2017, a major cyber-attack caused havoc with multiple banking systems across the UK. There’s a continued risk of this happening again which means you’re at risk of not being able to access your money when you need it.
If a cyber-attack affects the operating of your bank, when you have a second account with a separate bank, you’ll still have access to some of your money.
Have you ever had your card blocked by your bank when you’re away? Fraud teams prefer to be safe than sorry and you may well find yourself without access to your account at some point.
By having more than one bank account, you can use your second account if your first is blocked by a fraud team.
Manage a Budget
The average household debt in the UK is over £15,000 and the figures are worse in the US, where the average individual’s debt is $38,000 (£29,000). One thing is clear, we need to be budgeting more effectively.
With one bank account, all of your income and outgoings are lumped in together. This makes it difficult to manage money for different outgoings and to save proactively.
When you have multiple bank accounts, you can use one for day-to-day spending and others for separate purposes. This includes savings, mortgage or rent payments, self-employed tax, and whichever purposes suit your life.
It’s easy to move money from one bank to another, allowing you to move money into savings the moment you get paid.
Savings Accounts and ISAs
Savings accounts and ISAs often have far better interest rates than current accounts, allowing you to make money and benefit from tax-free interest. It’s wise to have designated savings accounts that you move money into and don’t use as day-to-day spending money.
Even saving small amounts has a compound effect as you’ll earn interest on the full balance, including previous interest payments. Keeping this savings money separate from your usual current accounts stops you from seeing it easily and being tempted to spend it.
It’s increasingly easier to open bank accounts in other currencies. Having a Euro bank account, for instance, means you avoid foreign transaction fees and variable exchange rates.
It also means you can withdraw money easily in Euro countries from ATMs without facing charges.
Separating Personal and Business Accounts
If you run a business, even as a sole proprietor, keeping your personal and business finances separate will make your life easier. You’ll get a better picture of how well your business is doing and can keep track of payments and outgoings more easily.
Some business accounts also come with added benefits such as free business advice or discounted business products.
If you share outgoings with a partner, having a joint account can help you manage your shared responsibilities. If you jointly pay a mortgage or rent, utilities, and subscriptions, you can store this money each month in your joint account and create direct debits to pay out.
This is a useful way of separating joint expenditure from your personal finances. This can also offer a small amount of financial protection in the event of the death of an unmarried partner. On the death of one joint account holder, the account will automatically belong to the surviving account holder regardless of marital status.
Stay Safe with Multiple Bank Accounts
There are many benefits of having multiple bank accounts and having only one puts your money at risk. Having more than one account helps protect your money from bank instability and cyber attacks, enabling you to access part of your wealth.
It’s also helpful for travelling abroad and saving for your future. You can take advantage of better interest rates, separate savings from everyday spending, and see business finances clearly.
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