Do incessant sales calls irritate you? While that is a problem that most individuals have to deal with, have you ever wondered whether a part of the problem could be actually yours? You may have lost count of the number of bank accounts you have—one was opened by parents, one you created and your several employers opened one salary account each for you—and each account is a place for the telemarketeer to tap for sales calls they make only to their “preferred customers”.
By the age of 40, most of us have more than four bank accounts. The reason could be sheer lethargy or even lack of awareness that having several accounts can work against you. Not only do they clutter your financial life and make it tough for you to streamline cash flows, but are also expensive.
Having one bank account is ideal, but if you are a salaried individual, you may need to keep changing your bank depending on the arrangement your employer has. We suggest you keep two accounts—permanent account for long-term transactions and salary account, which you can close whenever required, for daily cash flows. Here is how to manage the two accounts.
You need this account to keep track of your long-term financial transactions. For instance, your home loan’s equated monthly instalments (EMIs), systematic investment plans (SIPs) or for that matter income-tax reimbursements, all need a one-point source.
The disadvantage of routing these payments through your salary account is that when you shift into a new job and your employer opens a new salary account for you, you would need to transfer all these transactions to the new account. While transferring your EMIs and SIPs may just entail physical drudge and a lot of paperwork, changing your accounts while waiting for your income-tax reimbursements could even mean a financial loss.
Says Pankaj Mathpal, Pankaj Mathpal and Associates, Mumbai-based financial planning firm: “Individuals should maintain one personal account in addition to their salary account for their investment and loan payments. People who have opted for direct credit facility in their investment schemes for redemption or dividend may have to change their bank account if they had chosen a salary account. If they don’t, the credit will be used to pay for the minimum balance requirement charges as your zero-balance account will be a regular account after you leave your job. In case of loans, where the lender always collects post-dated cheques or direct debit/electronic clearing service mandate, the lender would charge a fee for changing the bank mandate. So, changing the bank mandate each time the employee changes his job, will be a costly affair.”
However, you would need to transfer funds to your permanent account from your salary account regularly. But online banking has made that easy.
With each shift in job, your employer would open a new account for you. Since this account is one that is short-term in most cases, we suggest you manage your daily cash flows through it.
Every month once your salary gets credited into the account, budget your monthly spends. Keep a buffer and transfer the rest to your permanent account. Ideally this account should be tracking your debit card and credit card spends.
Says Sumeet Vaid, founder and managing director, FFreedom Financial Planners, a Mumbai-based financial planning firm: “For all practical purposes, this is your core account because this gets your salary and you can see all your cash flows. It is from this account that you make further segregation. Since it is a zero balance account, it can also be used during an emergency.”
The case of couples
So, how do you manage two accounts in case you are married and want to plan your finances together? We suggest you make the same segregation.
However, all your accounts should be joint. A joint account works on the principle of either or survivor, which means either of the spouses or whoever is the survivor owns the account. Not only can you access the account of your partner, but also claim ownership and bypass the legal grind in case the partner dies.
Why fewer accounts
Cut the clutter: The basic advantage of having fewer accounts is that you manage to circumvent the clutter in your financial life. Fewer accounts help you track your cash flows since all your spending and earning are at one place. This way, you can also work out the income-expenditure matrix more effectively, which is key to planning your finances.
Says Vaid: “Too many accounts would mean spends getting spread out. Hence, mentally you switch off from tracking your spends. It is difficult to control your spends as you will not be able to recognize your spending pattern.”
Smoothen paperwork: Digging up records would also become easier. For instance, while applying for a loan, your bank may ask you to give a bank account statement for six months of all of your operative bank accounts. Imagine what you will have to go through if you have a number of accounts running.
Adds C.S. Jain, head, personal banking group, IDBI Bank Ltd: “Having a number of accounts means you need to look into various correspondence for so many institutions. Minimum balances have to be maintained in various accounts.”
Also, maintaining four to five bank accounts could mean a lot of additional paperwork in terms of tracking multiple statements, cheque books, apart from other bank documents.
Cost benefits: Salary accounts have their own benefits, which you would lose once you join a new organization and the earlier account ceases to be a salary account. A normal account would require you to maintain a minimum balance against the zero balance requirement in a salary account. Not maintaining the minimum balance can cost you anything between Rs100 and Rs1,000. On the other hand, closing a bank account is usually free of cost.
Adds Mathpal: “As one needs to maintain a minimum balance in the account, it does not make sense to maintain too many accounts and keep the money idle in saving bank accounts whose interest is as low as 3.5% per annum.”
So, track all your idle bank accounts and close them now to make your financial life simple.