Direct deposits are one of the most popular ways of paying and receiving money directly into an account. It’s commonly used by employers when sending payments to employee bank accounts or to other financial accounts, such as a prepaid card account.
But how do they work? We break down everything you need to know about direct deposits, how to set them up, and cover some common questions people have about them.
What is direct deposit?
First of all, what is a direct deposit and how does one work?
A direct deposit is a deposit of funds into a bank account. This deposit is made electronically rather than relying on a physical paper check. It’s a fast and efficient way to transfer money and it can be used in lots of different scenarios.
How direct deposits work
A direct deposit takes place across an electronic network called an automated clearing house (ACH). This allows funds to transfer electronically which automatically credits a recipient's bank account with the balance.
There’s no need to wait for the money to clear like you would with a paper check. The beauty of the automated clearing house is that this can all happen, usually, within minutes.
How to set up direct deposits
For a direct deposit to work, it must be set up correctly first.
To transfer money to the recipient, the payer must use:
The correct name of the bank
The recipient’s account number
The bank’s routing number
As well as this, the payer must provide the name of the individual or the business making the deposit.
It can take up to a few days for a direct deposit to be set up. However, once everything is set up, payments should be virtually instant and you won’t have to wait days each time you receive a paycheck.
What should you use direct deposits for?
Direct deposits are commonly used by employers to pay their employees because it’s a quick and simple way to pay a lot of people all at once.
Direct deposits are also used for things like tax refunds, pensions, and state benefit payments.
The benefits of direct deposits
There’s a good reason why direct deposits are the go-to method for employers to pay people. In fact, there are a few different benefits to this payment method.
Fast payments mean recipients get the funds they need without having to wait in line to cash a paper check.
Employees don’t have to be in the office to receive their paycheck
There’s less chance of having paychecks stolen or getting lost
You don’t need to visit an ATM or bank to deposit checks
Businesses can avoid payroll fraud schemes, check fraud, and delays in payments
Having the money in your bank account could help you manage your money more effectively
Direct deposits are typically free, all you need is a bank account
Funds from direct deposits can be diverted into savings accounts to help you save each month
Are there any downsides?
Some downsides that you might want to factor in are potential bank fees, account security issues, and delays on your employer’s end. Bank fees don’t always apply but many banks do require a monthly maintenance fee.
Another potential downside is if your employer faces delays, for example, with processing payroll. However, these downsides could just as easily apply to paper checks.
The other downside to direct deposits also applies to any type of online banking or payment system. Online financial services are sometimes vulnerable to things like phishing or other financial scams. For example, if scammers manage to obtain your password, this could put your money at risk. However, with vigilance and good password practice, this can help you avoid potential risks.
Overall, the benefits tend to outweigh the downsides of direct deposits.
Can you direct deposit into a savings account?
Usually, yes you can send direct deposits to a savings account.
The primary benefit of this is that the money doesn’t end up in your checking account, ready for you to spend. It’s one method of automating your savings practice, which is important for those who struggle with willpower or forget to save each month.
For example, if you are trying the 50/30/20 budgeting model, being able to transfer 20% of your paycheck into savings accounts can help make the budget easier to follow.
However, some savings accounts are not suitable. They may have transaction limits or even higher fees which is also worth considering.
How to send direct deposits to your savings account
The first thing to do is think about how you’re receiving a direct deposit. If you want your paycheck to go directly into savings, you will need to approach your employer and fill in a direct deposit form.
In this form, you typically need to include information such as your bank’s address, routing number, savings account number, type of account, Social Security number, and whatever other information the form requires.
You can then choose a deposit amount. The good thing about this method is you can either choose to deposit 100% of the amount into your account (which is ideal if you have multiple income streams or different jobs) or you can split up the amount between your savings and checking accounts. You might decide to save a set percentage of your paycheck and keep the rest in your regular checking account for monthly expenses.
Another thing worth bearing in mind is that some checking accounts have a minimum balance you must maintain to keep the account open. Some checking accounts may apply fees if you come below that threshold.
Before you send direct deposits to your savings account, be sure to check with your bank to see if you will still meet the minimum account requirements.
Get paid up to 2 days faster1 with Netspend Prepaid Card
In some cases, you might not even have to wait until payday to access your wages.
If your employer pays you via direct deposit, you could get paid up to two days faster1 with a Netspend Prepaid card.
Sign up today to take advantage of this Netspend feature and check the box that says Paycheck (up to 2 days faster).
Faster funding claim is based on a comparison of our policy of making funds available upon receipt of payment instruction versus the typical banking practice of posting funds at settlement. Fraud prevention restrictions may delay availability of funds with or without notice. Early availability of funds requires payor’s support of direct deposit and is subject to the timing of payor’s payment instruction.