Maintaining minimum balance and tracking all bank accounts can be cumbersome
The more bank accounts you hold, the more money you keep locked in due to minimum balance requirements
Gurugram-based Shrinidhi Shetty, 35, has six bank accounts registered in his name. He opened these accounts over a course of time for various reasons. “One account was for my demat account, two for home loans, three were salary accounts which I had to open each time I changed jobs and the sixth one was to facilitate the processing of my Aadhaar," said Shrinidhi, a petroleum engineer. All six bank accounts have been serving some purpose but Shrinidhi has been planning to close at least three of them for a while now. “One of the accounts I want to close offers a higher interest rates on fixed deposits while the other offers a better banking experience in terms of technology and ease. The third account (salary account) which also has very low activity was for one of my previous jobs," said Shrinidhi. He has about ₹25,000-30,000 parked in these accounts in order to maintain the minimum balance requirement. Could he have made better use of this money?
Shrinidhi is not alone. Many people end up opening multiple bank accounts either when they change jobs or for saving for specific goals like buying a house, child’s education and so on. According to the World Bank’s 2017 Global Findex report, almost half of the account holders in India had an account that remained inactive in 2016. This is the highest in the world and about twice the average of 25% for developing economies. Read on to know how much is too much when it comes to bank accounts.
It’s important to understand that the more bank accounts you hold, the more money you keep locked in those accounts. Most banks demand a minimum balance requirement from an account holder and non-maintenance could attract penalty. The minimum balance requirement could range anywhere between ₹5,000- ₹10,000. This means if you have, say, five savings accounts, then you would have to put aside about ₹25,000-50,000.
“The minimum balance would give you returns at a rate of 3-4% per annum. Instead, if you put this money in a fixed deposit, you would be drawing nearly twice as much interest. Savings accounts also come with other expenses in the form of debit card charges that have to be paid regardless of the usage," said Adhil Shetty, CEO, BankBazaar, an online financial services marketplace. Note that if your zero balance savings account or salary account is not credited with salary for three consecutive months, then your bank could turn such a zero balance savings account into a normal savings account, forcing you to maintain the minimum average balance.
If an account has been inactive for two or more years, the bank considers it dormant. In such a case, you would not be able to perform any transactions from that account via debit card, cheques, online or mobile banking. You will be required to reactivate the account by submitting a written application. If it’s a joint account, all the holders will have to give their consent.
“Apart from losing returns on idle funds (minimum balance requirements for each account to be maintained), ensuring analysis of each account for tax returns could get cumbersome. Remembering and changing passwords frequently for online access and recalling them could be other issues," said Lovaii Navlakhi, managing director and CEO, International Money Matters, a financial planning firm.
What to do
Navlakhi said, the lesser the better when it comes to bank accounts. Shetty said one should restrict the number of savings accounts to two. “The first would be your salary account, the other should be a joint account with your parents or spouse where you can park your emergency funds. A joint account would ensure that your family can access the money in case of an emergency where you are not available immediately," said Shetty.You could also go up to three accounts with one permanent account, one joint account with your spouse or partner and one salary account. “The salary account could change each time you change your job and hence maintaining one permanent account where your investments such as mutual funds or employees’ provident fund are linked helps. Remember the more accounts you maintain, the more minimum balances and cards you will need to keep. It’s advisable to close the older accounts," said Shweta Jain, chief executive officer and founder, Investography, a financial planning firm.
Furthermore, you may not even realise how much or what you are paying in charges because almost all services offered by banks come with a fee. “You might swipe one card thinking it is another. In fact, this has happened with me too. You may not be able to track expenses as they are all over the place," said Jain.
With the universal account number (UAN) now taken as your EPF ID, no new EPF accounts need to be opened each time you change your job but you may have to update your bank account with the EPFO. Having a permanent account helps in this case. “People find it difficult to change the bank details in the long run when they try to withdraw the money from their EPF account. Similarly, if you link your other long-term investments such as mutual funds or public provident fund with multiple bank accounts, it could lead to a lot of confusion," said Basavaraj Tonagatti, a certified financial planner and Sebi-registered investment adviser. A simple solution would be to use your permanent bank account as your main operating account. Set up an electronic transfer to the main account each time you change jobs, and then close the older bank accounts.
Your bank account, PAN and Aadhaar are the three vital identities for your financial life. From tax payments and investments to paying your utility bills, all of these require your bank account, PAN and Aadhaar to be linked for know your customer (KYC) purpose. It is best to use one permanent bank account and make sure it is linked with all your financial dealings such as income tax payments, EPF, PPF, mutual funds, demat account and for your monthly bill payments," said Tonagatti.
Understand that closing all unwanted bank accounts means less chance of misuse as having fewer accounts makes it easier to track transactions regularly. Shetty said, fewer accounts also means easy tax filing with fewer receipts and interest earnings to put in record.
Once you’ve realised that you’ve not been using a particular bank account for three to four months and there are no transactions or standing instructions linked with that account, it’s best to close it (read: How to close unwanted bank accounts).
If you have changed jobs and have to open a new salary account with the new company, you could close the old salary account over the next two months. “Typically, three months after one has quit the job, salary accounts tend to have a minimum balance requirement. This is a good reminder to close it and move on," said Jain.
However, before closing the account, make sure that there are no dues left and all the National Automated Clearing House (NACH) mandates are de-linked or moved to another account. Having up to two bank accounts is ideal, or at best three. But beyond this, it does no good to your money life.