How many accounts should one have?

We often end up having a lot of dormant bank accounts. It's time we cleaned up our act.

Rajesh Sharma, 45, management professional, has shifted several jobs over the years.No wonder, he has more than five bank accounts because each time he changed jobs, the employer opened a new account for him with their bank.

When his wife asks about the balance in the various accounts, he has to rummage through the entire pile of papers in his desk to come up with a reply. The worse part is that he actually has negative balances in some of them because he has not maintained the minimum balance in these accounts. He desperate wants to close some of them, but does not have the time or patience to go to a branch and wait there. Surely, a very common story for many professionals.

Sharma uses one account to pay his credit card bills, another one for home loan equated monthly instalments, a third for investments and insurance requirements, and living expenses from a fourth. Obviously, deposits and transfers have to be made on an ongoing basis to meet minimum balances in these four accounts leading to a lot of confusion. His situation reminds us of the cliche: keep it simple, stupid. And Sharma has brought it upon himself.

When we talk about money, having more of it is better, but when looking for a place to park them, lesser confusion is certainly better. Of course, it is important to have more than one bank account. This is mainly because the money we deposit in banks is insured to the tune of just Rs 100,000 per account. So, if god forbid, your bank were to go bust, you would be in serious trouble.

To address this risk you should have at least two bank accounts at a single time. Also, for the business person, it is ideal if your business accounts are kept away from personal ones. This will make record keeping easier and ensure that when it's tax time you can comfortably segregate personal and professional expenses.

How many accounts should one have?

To answer this question, let us first understand the various avenues or transactions that would involve a bank account. Basically there are 2 types:

• Inflows (salary, interest, dividend, gifts, rental income or lottery)
• Outflows (loan payments, credit card payments, lifestyle expenses, gifts, investments, and insurance payments)

Generally people have these accounts:

• Salary account
• Salary account/s through previous employer
• Dormant accounts
• Home loan attached to an account
• PPF account (Generally with nationalised banks)
• Current account, if you are a business owner
• Accounts on the names of spouses and children.

Considering the above and a double income family, there would at least be around four to six different accounts. And managing all of them becomes cumbersome and you realise the complexity of the issue when you have to collate this information to give your chartered accountant or financial advisor.

To cut down on clutter, it is best if you have two accounts and take the following steps:

1. I am sure all agree that the most important account is the salary account. If your employer does not provide one, designate one account as your salary or inflow account. All inflows whether salary, dividends, interest should go into this
account. (It is likely that you have some fixed deposits in other banks and hence, some interest coming there which is easy to manage).

2. Ensure that all your home loan EMI, insurance payments and investments are made from this account. You can set up an auto-debit for these transactions from this account itself. Having one account for your inflows, as well as your outflows makes your and your chartered accountant's life much easier. Of course, many people have home loans and could have a separate bank account with the home loan account. 

3. Have a separate account for all your living expenses. You could even opt for a joint account with your spouse that can be utilised for all bill and credit card payments (including telephone, property maintenance, cable, food, groceries, petrol, vacation etc.)

4. You could do it the other way around as well, where you do all the expenses from your salary account and investments, insurance and loan payments from another account. Since home or car Loan EMIs, insurance premiums and investments are well-known in advance, you can be pretty sure of the amount that you need to transfer from your salary account.

5. It is important to remember that crores of rupees go unclaimed every year from forgotten or dormant accounts. These are mostly because a large number of people who have not used these accounts for years. It is best if you have two or at best, three bank accounts. As they say, too many cooks spoil the broth. Similarly, too many
accounts spoil your finances.

The writer is director, My Financial Advisor