Save More by Avoiding Multiple Bank Accounts

by Michael Kling on 17 June 2013 4 comments

Want to save more? Keep it simple.

Conventional wisdom holds that people should spread savings across different accounts, and the typical American has multiple checking and savings and other types of financial accounts. However, they're more likely to save more with just one savings account, according to a new study by a University of Kansas researcher. (See also: Zen and the Art of Hiding Money)

People save more if they have just one account compared to multiple checking and savings accounts, according to Kansas University assistant professor Promothesh Chatterjee.

"Nowadays, the average American has multiple liquid accounts, typically a combination of checking and savings accounts," he said in a press release. "But our research finds this is the wrong strategy to encourage saving. We find that individuals are more likely to save if they have only one primary account, rather than many accounts."

Banking Implications

His research has implications for accepted banking practices and national policies. Banks frequently offer several accounts to new clients, but the findings argue against that practice.

Americans save next to nothing — the current national savings rate is estimated at 5%. And the inability to save cuts across income and educational levels.

"Given that context, this type of research is important to lots of people," Chatterjee said.

Why does having several accounts encourage people to save less?

Utilizing work on motivated reasoning and fuzzy-trace theory, we suggest that multiple accounts engender fuzzy gist representations, making it easier for people to generate justifications to support their desired spending decisions. However, a single account reduces the latitude for distortion and hinders generation of justifications to support desirable spending decisions.

Fuzzy Savings

In other words, people with more accounts lack a clear idea of how much they have saved and use that muddled picture to rationalize their spending decisions. We feel good about ourselves over the long-term when we save, but we feel good right away when we spend, which prompts us to find justifications to spend.

Simply put, if you have different savings accounts, it's easy to convince yourself that you have a ton of savings. If you have it all in one place, you can plainly see what you have — or don't have.

Those who are opposed to consolidating accounts, according to the research, can at least try using software programs that add up different accounts, allowing users to see the total in one place.

His research used four separate studies with a total of 566 participants who had the opportunity to earn, spend, and save money. The results were published in the May 2013 issue of the journal "Organizational Behavior and Human Decision Processes."

The students participating in the study earned money for doing tasks on a computer, and then had chances to buy items, such as university T-shirts, notebooks, and a computer mouse, or add money to their savings, according to a New York Times story on the research. Those who kept earnings in a single account saved more than those with multiple accounts. The issue was not their mathematical abilities, but rather their motivation, Chatterjee said.

Targeted Accounts for Saving?

Others disagree and argue that using targeted savings accounts is the best way to accumulate savings.

Different savings accounts — for example for emergencies, a new car, and a vacation — offer a motivational tool for saving for specific goals, writes one proponent of targeted savings accounts, J.D. Roth, founder of website Get Rich Slowly and author of "Your Money: The Missing Manual."

When savings are combined, it's easy to lose track of how much you've saved for each goal and use money for one goal to pay for another use, he says, adding that online savings accounts offer higher yields and let customers split their funds into subaccounts and even name them.

Do you use multiple accounts to manage your savings or just one? What works best for you in terms of reaching your savings goals?

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Guest's picture

"Conventional wisdom holds that people should spread savings across different accounts, and the typical American has multiple checking and savings and other types of financial accounts."

I've never heard that, unless you're near the FDIC insurance limits. Who's advising people to do this, and why?

Guest's picture

I have one savings account. Once all the bills are paid I transfer funds over from checking. It's nice to see how much I have saved in one glance.

Guest's picture

I just find it annoying to have more money than I have to tied up because of deposit minimums. $100 minimum in a savings account here, $1500 minimum there; it adds up

Guest's picture

We have various accounts for various goals, and have for years. It works well for us....there's no temptation to dip into the 'next car' savings to bolster our vacation fund because they're two completely separate accounts. It's not rocket science to take a moment to tally up the total value of all your accounts- you just need to spare a few minutes to do so. I do every month or so, and even with over half a dozen accounts for various things (home repairs, vacation, next car, medical/pet emergencies, 'general' emergency fund, Christmas money, etc), I can tell you within $500 how much we hold in total, as well as what each account holds within $100 or so. It's not difficult if you choose to pay attention to your own money.

We are, of course, careful to park our savings where we will not be charged fees on the accounts. Our method isn't for everyone, but it suits us well and we're happy with it. I have great peace of mind when I look over the various accounts as everything is neatly laid out for me ($x for vacation, $y saved for our next car purchase, $z saved for those upcoming braces) instead of seeing one big number and thinking everything's covered.

Some might prefer the big picture, but we prefer to sweat the details along the way. It makes for a smoother trip to various goals, in my experience.