How did you get here?
Maybe you didn't plan to get to this point. You had a 401(k) from an old job and never got around to rolling it over. Then you got another job and signed up for that plan too. You opened a bank account because it had a great signing bonus. Or maybe you wanted a special savings account for a specific goal. But you never completely emptied the account, and now there's a relatively small amount of money just sitting there.
If this sounds kind of like your situation, those multiple accounts might not be the best way to put your money to work on your behalf.
Downsides to having too many accounts
We like to think that spreading things out promotes safety and diversity in our finances. While a certain amount of diversity is important, there's also a benefit in consolidation. Problems can arise when you have too many accounts working at odds.
Here's a rundown of some of the biggest downsides to having too many financial accounts.
First of all, you may have forgotten accounts that aren't working as well as they should. Unclaimed assets aren't doing what they could be doing — and that can leave you with money you don't even know you have. Look for old, forgotten accounts to see if you can bring them back into your overall plan.
Old accounts could be charging you fees you don't need to pay. This could be cutting into your real returns and resulting in opportunity costs. This can be especially true with old retirement plans that haven't been rolled over and consolidated. You could be paying high fees at several accounts scattered about. Empower, in particular, has a great free tool that can help you decide if you're paying too much in investment fees.
Additionally, you could be losing money in your bank accounts thanks to monthly maintenance fees. If you've got an account that charges fees if you don't meet a certain minimum each month, that could be costing you.
The more assets you have in one place, the more likely you are to see lower fees and get better perks. While you don't have to put everything in one basket all the time, you can benefit when you do a little consolidation.
Your money doesn't earn what it could be earning
Compounding returns are higher when your assets are in the same place. For example, take all your various 401(k) balances. They're earning money, but what if you rolled them all into one IRA at a single brokerage? If you put everything into an account with Betterment, for example, the pooled assets would grow faster.
The same principle applies even with spread-out bank accounts. Combining the balances from these accounts into the bank with the best yields and lowest fees can get your liquid cash into one place, helping you see better returns.
You might not have true diversity
Just because your money is in different accounts doesn't mean it's diverse. The types of assets held in mutual funds often overlap, so you actually could be holding very similar investments across your spread-out brokerage accounts. You might not have true diversity after all, and that could hurt you in the long run — especially if you don't realize there's a problem.
Finally, too many accounts often means a great deal of effort. At tax time, you have to deal with several reporting forms, and you have to manage all of the issues that come with that. In addition, you regularly have to monitor more accounts, balancing them each month and making sure they aren't compromised. Consolidating can make it easier to stay on top of everything.
Plus, when you've got too many accounts, you're at a greater risk of mistakes. For example, if you have several different IRAs, you're limited to $6,000 in combined contributions across all of them. If you're contributing to more than one IRA, it's very possible that you're over-contributing — and you'll have to fix that mistake later. The more mistakes you have to fix, the greater the effort that goes into managing your money.
Reasons to keep some accounts separate
Now, this doesn't mean that you have to consolidate everything into only one or two accounts. In some cases, it makes sense to keep old accounts or have some different accounts in different places.
- Consequences of account liquidation: Before you liquidate an old investment account, it's important to take a look at the consequences. Rolling over an old account may require you to liquidate assets in a way that results in extra fees or taxes. Weigh the costs against the benefit. It may not be worth it.
- Goals for your money: In some cases, you may have different needs or goals for the money. Perhaps you like keeping your emergency fund separate from your vacation fund. That can be a good reason for keeping some of your bank accounts separate.
- You need different features: Before you move your money, think about the features you receive. You might like the idea of having a health savings account (HSA) that allows you to get multiple tax benefits while allowing you to grow the account. Combining that money with an IRA or moving it into a regular bank account just wouldn't make sense.
When consolidating, it's more about figuring out if like-money should be combined with other like-money. Do you really need five different savings accounts at five different banks? Probably not. However, you could move them all to a bank such as Ally, which allows you to create sub-accounts for different goals and offers fairly decent yields. At the same time, Ally doesn't charge any maintenance fees or require a minimum deposit, so you can be sure you're not letting money unnecessarily drain away.
Streamlining your finances
Another way to streamline your finances is to see if you can manage different types of accounts in one place.
For example, brokerages such as TD Ameritrade offer banking services that connect to your investment accounts, allowing you to manage different types of money without straying too far.
Betterment also offers the ability for you to aggregate outside accounts so you can see what's happening in one place — even if you don't consolidate everything. Betterment also offers a high-yield savings product (although it's not FDIC-insured).
Consolidating your assets to the point where it makes sense is a good plan. I have a taxable investment account and my consolidated IRA at Betterment, but I keep my HSA money with Lively. However, I also have checking and savings accounts — as well as a business account — with Capital One. While I keep my money in different places, I do try to limit how scattered everything is.
Finally, even if you decide that you need a few different accounts to fulfill different financial purposes, at least connect them so you can get a top-level view of your finances. Tools such as Empower allow you to connect your banking and investment accounts in a way that lets you see everything. This holistic view can help you see where everything is, identify problems, and address them without making too much of an effort.
In the end, the goal is to get your money to work most effectively for you. With everything spread too thin, you could be paying more in fees — and earning less in returns — than you should be. Review your accounts and see where you can consolidate (you can also use personal finance software to do this). And once you've consolidated as much as appropriate, use an account aggregator so you can see everything in one place.
Once your money is working more effectively for you, you'll be amazed at how much faster your net worth grows.