Patrick Wright* looks at the downside to this popular budgeting method.
Have you ever tried a budget? If you have, you’ve probably heard about strategies to separate each expense or savings goal.
Some people literally stuff envelopes with cash; others prefer to use online banking to set up multiple accounts with separate cards.
For example Scott Pape, author of The Barefoot Investor, recommends using five bank accounts to separate everyday expenses from “splurges” and emergency funds.
Many people find such approaches helpful.
But there can be some downsides to using multiple bank accounts, according to Andy Kollmorgen, investigations editor at consumer advocacy group Choice.
Here’s what you need to know.
Mistake #1: Letting a bank charge you an account-keeping fee
When it comes to day-to-day banking, it’s important to make sure your bank isn’t charging you account-keeping and administrative fees.
It’s particularly important if you’re setting up several accounts for your budget, as you could be charged multiple fees.
By depositing your cash with a bank, you are giving the bank access to your capital, and there’s no reason that you should pay them for that privilege, Mr Kollmorgen adds.
“All fees will need to be disclosed on the relevant product disclosure statement for the account, which you can find on the website,” he says.
Keep in mind that some account-keeping fees are charged each month, while others may be conditional on making a certain number of transactions or deposits.
If your accounts could be overdrawn, it’s also important to check for overdraft fees, which can be substantial, Mr Kollmorgen says.
“Some banks give you an overdraft cushion … they won’t immediately charge you an overdraft fee, they’ll give you 24 hours to bring into balance,” he says.
Mistake #2: Missing out on interest on your savings
These days, it’s easy to find savings accounts paying 4 per cent or more in interest each year.
So, there’s no reason to keep your money in an account or bank that’s not paying a competitive rate (or offsetting your home loan, if you have one).
“The ACCC recently reported that Australians have about $1.3 trillion sitting in bank accounts. The banks owe it to us to give us a reasonable interest rate,” Mr Kollmorgen says.
Often, the savings accounts with the highest rates have hoops to jump through.
You might need to increase your savings balance each month or make a certain number of transactions.
Other products have a high introductory rate that drops significantly after a short honeymoon period.
That’s why it can make sense to settle for a lower rate without the extra hurdles, especially if you’ll have cash sitting in multiple accounts for your budget.
Finally, some banks have cottoned on to the fact that people are looking to set up multiple “buckets” for their budgets.
So, you can find products that will allow you to separate your savings into different categories within the same account (for example, via an app) while still earning decent interest.
Mistake #3: Using a system that’s too complicated
Setting up separate bank accounts for different goals or expenses can create a lot of administrative work.
You might find yourself forgetting about a bill or direct debit and being charged an overdraft fee.
Some people even forget about old bank accounts they’ve set up.
In fact, Australians have around $1.5 billion in forgotten bank accounts, shares and life insurance.
If you think you may have lost track of some money yourself, ASIC’s MoneySmart website has a simple tool that can help you find any unclaimed money.
While it’s important to find a budgeting system that works for you, Mr Kollmorgen says simple solutions are often better.
And that may mean a system without multiple bank accounts.
Instead, you could use budgeting software or a spreadsheet to track your spending.
Or you could try another budgeting method that doesn’t involve multiple bank accounts.
This is general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.
*Patrick Wright is a reporter for ABC Life.
This article first appeared at abc.net.au.
