Shouldn’t one bank account or brokerage account be sufficient?
Most people have more than one credit card, but do they really need them? Learn why and how to diversify without increasing your exposure or jeopardizing your future credit.
There are two distinct schools of philosophy when it comes to finances. Less is more and more is better. Okay, maybe when we are talking about money, more is better, but when looking for a place for that money, less may be more. Some people will go their entire lifetime without a bank account and others will have several. Stuffing cash under the mattress or in the freezer may be fiscally irresponsible, but is often a result of a mistrust of the system or misunderstanding of the risks.
You can minimize that risk through diversification. Most of us know that the money we have in our bank account is insured up to a maximum of $100,000 through either a private insurer or government-initiated insurance program, such as FDIC. You should have at least two bank accounts. If one institution becomes financially insolvent (goes broke), even though your money is insured, you will likely wait months or sometimes years before having access to it again. In the meantime, you will need to have access to other funds. Risk of loss is not the only reason though.
There are several other benefits of having multiple bank accounts. For example, have you ever been traveling and tried to get cash from an ATM, but you can’t find one on your network? This happens frequently, especially in foreign countries. Most banks either subscribe to the Plus system or the Cirrus system in addition to any regional systems. Some banks, especially in larger metropolitan areas do subscribe to both. If you do have two accounts, be sure that they operate on different ATM networks and you will always have easy access.
If you have a business, even if it is just a small at-home business, you should have a separate bank account. This will make record keeping easier and ensure that when tax time rolls around you can show that you operated your business separately from your personal and therefore validate the business as such, rather than as a hobby. By the way, all of these recommendations apply to a business as well as your personal accounts.
A word of caution, millions of dollars go unclaimed every year from lost or abandoned accounts. This is often the result of people who are over diversified. Make sure that you have more than one bank account, but do not open a new account or move to a new institution each time you deposit money. For example, if you open a Certificate of Deposit with several maturity dates, try to do it with the same bank (unless you can obtain a higher rate elsewhere) up to the $100,000 exposure limit. Consolidating the number of institutions you deal with will limit your risk of forgetting about your money.
The same basic rules apply to brokerage accounts. Make sure that any broker that you choose subscribes to and is a member of SIPC (Securities Investor Protection Corporation) or a similar insurance program. SIPC will ensure your deposits and investments up to $500,000 per customer with a $100,000 cap on cash. Unlike the FDIC however, they impose qualifications, including a lack of protection from being sold worthless securities. So, you can also see that at least two brokerage accounts should be maintained if either you reach the cap on SIPC liability or you will not have sufficient funds to survive should those investments be inaccessible for at least 6 months in the event of a failure.
Many brokerage firms have developed products that act as a bank account with check writing privileges, ATM cards, and various other options. Make sure that you understand what insurance limits apply. If you are utilizing your brokerage account as a money market account, the ATM diversity mentioned above also applies.
Now, what about credit? This topic draws differing opinions from experts. How many credit cards are too many? How does having excess, unused credit impact your future borrowing? Well, all I can say is that you will want more than one for the same reasons described above. Having one credit card will put you at risk in the event of that card being stolen or the bank cutting off credit for a variety of reasons (including discontinuation of the program).
I recommend having a Visa and a Mastercard as each will provide unique program benefits and discounts. Visa may offer product protections, additional warranties, and travel protection, while Matercard may offer promotional discounts for using the card and travel planning benefits. This is just an example, as it will vary by the sponsor (the bank offering the card).
As internet commerce has grown, consumers have begun to be more protective of their credit. If you are concerned about using a credit card for internet purchases, I recommend getting a credit card just for that purpose. Make sure that it has $0 liability protection and keep the credit limit low, say $500 or $1000. Several provider banks offer these cards, including CapitalOne.
I like to avoid store branded credit cards; they clutter your credit report and frequently have high interest rates with little or no benefits. If you are enticed by a discount on your purchases, get a Visa, Mastercard, American Express or Discover card that provides either cash back or other rewards. Try to consolidate your purchases and take advantage of 0% or low interest rates, but don’t let the credit cards accumulate.
Cancel unwanted cards instead of leaving them open. The number of open accounts, whether used or not, and the number of inquiries on your credit do impact your credit rating and ability to obtain credit. Having only one credit card can also impact your future borrowing. So, it makes sense to have more than one, but not too many. What constitutes too many is open to interpretation, but I would not suggest more than 5-6.
When choosing a card, make sure that it fits your needs and spending habits. If you anticipate making transactions in foreign currencies or making ATM withdrawals (cash advances) review the fees and surcharges before applying. Not all cards are created equal when it comes to fees. Choosing carefully upfront will avoid costly mistakes later.
So, when it comes to managing your money, you need to be aware of risk, diversity, benefits, flexibility, and fees. Don’t put all of your money in one place and don’t rely on just one source of credit, but don’t diversify beyond control either.