Direct Deposit: An Old Trick to Boost Savings Rates

For years, personal finance experts have advised direct deposit, rather than cashing a paycheck, as a method to increase your savings. The idea is that if you never have the extra cash in your pocket, you are less likely to overspend. It’s good advice, but changing times require a slight modification in how direct deposits are handled.

People tend to have paychecks directly deposited into their checking accounts, so the money will be available to pay their bills. However, with the proliferation of debit cards, having a paycheck go into your checking account is really no different from having the money in your pocket.

Here’s an alternative approach: have paychecks directly deposited into a savings account or money market account. Then, set up a single automatic monthly transfer in the amount of your monthly budget from the direct deposit account into your checking account.

Benefits of Direct Deposit to Savings Accounts or Money Market Accounts

Why this tweak to a tried-and-true direct deposit strategy? There are three benefits to depositing your paycheck in a savings account or money market account:

You Start Earning Interest Right Away

If money flows into an interest-bearing account as soon as it is available from your employer, it starts earning interest more quickly than if you wait to make a deposit from your checking account.

It Puts Some Discipline Into Your Budget

People tend to save “what’s left over.” Putting money into savings first and taking out only what’s in your budget is a more disciplined approach. It’s applying the old savings adage to “pay yourself first.”

It Helps You Meet Thresholds for Higher Money Market or Savings Account Interest Rates

Some accounts offer higher interest rates for larger depositors. Having your paycheck go into your money market or savings account first will help you meet those thresholds sooner.

Which Banks Have the Best Savings Account Rates?

Savings rates are higher than they’ve been in over 10 years, but if you’re using a traditional, big-name bank to stash your savings, you’re missing out on these rates.

Here are our top picks for those who want to earn a competitive APY on their savings.

How Does Direct Deposit Work?

Most checking accounts will accept direct deposits, and so will many savings accounts. You’ll need to talk to your employer to make sure their payroll system is set up to handle payments in this way. If it is a large employer or an employer using a large payroll processing firm, chances are they routinely handle direct deposits. With a small employer handling payroll manually, it is not necessarily a given.

If you have access to direct deposit, it’s a great convenience and effective budgeting tool. Here are five tips for using direct deposit to your advantage:

Direct Deposit Into a Checking Account Can Qualify You for a Fee Waiver

Most checking accounts these days charge a monthly maintenance fee, which tends to be quite expensive. Some banks offer to waive those fees under certain conditions, such as maintaining a certain minimum balance, but sometimes they involve having regular direct deposits made into the account.

Banks like the idea of money flowing automatically into your account, plus automated transactions help save them money, as opposed to you coming into a branch to deposit your paycheck. Since you want to set up direct deposit anyway, see if you can get a fee waiver out of the deal.

Consider Splitting Direct Deposit Between Checking and Savings

Having money directly deposited into a checking account is a convenience, but having at least some of your paycheck deposited into savings will help encourage saving money regularly. The idea is to have only enough to cover your budgeted expenses go into checking, so you are less tempted to spend outside of your budget.

See whether your payroll provider can split direct deposits, and if not, consider having your full payroll deposit go into savings and then periodically transfer a budgeted amount from savings to checking.

Find out How Quickly Your Bank Processes Deposits

To avoid overdrafts, know when direct deposits are actually available for your use. You might get paid on Friday, but the deposit may not be on the books until the following Monday.

Use Online Tools to Help Monitor Deposit Activity

If your bank offers online statements or mobile notifications, tools like these can help you monitor when your automated deposits hit your account.

Don’t Neglect Your 401(k) as Part of Your Payroll Directions

If your employer offers a 401(k) plan, consider directing some of your payroll toward that plan. This not only encourages saving, but it can also earn you tax advantages and the benefits of employer matching contributions if offered.

It is definitely worth talking to your employer about getting direct deposit set up because once you make that first step, it will make your life easier paycheck after paycheck.

Finding an Account With Low or No Fees

You may find that you actually want two bank accounts: a checking account to handle your pay coming in and any expenses you have going out and a savings account to help you accumulate money and earn interest.

Focusing first on the checking account, there are three major categories of fees you need to look out for: monthly maintenance fees, overdraft fees, and ATM fees. If you play your cards right, it is possible to have a checking account without paying any of these fees. Here are some tips on avoiding those fees.

Shop Around for Free Checking 

When banks refer to “free checking,” they mean an account with no monthly maintenance fee. Avoiding these fees is significant because, on average, they run to nearly $150 a year. The latest MoneyRates Bank Fee Survey found that only about three out of every 10 checking accounts have no monthly maintenance fees, which means they are in the minority but can be found if you shop around.

Use an Online Bank

That same fee survey found that your chances of getting free checking more than double if you look at online banks.

Opt Out of Overdraft Protection

At an average of $31.60 per occurrence, overdraft fees are expensive and unnecessary. Opt out of overdraft protection and learn good record-keeping habits so you don’t overdraw your account.

Choose a Bank With an ATM Network that Fits Your Needs

Make sure ATM locations are convenient enough for you to avoid incurring fees for using out-of-network machines.

The Bottom Line

While a checking account will give you ready access to your money, savings accounts and money market accounts are better equipped to help you meet your goal of saving money, so you might want to open one of these in addition to your checking account.

Chances are, you’ll find that checking accounts offer a negligible amount of interest, if any at all. Interest rates on savings accounts and money market accounts are really great these days, so it makes sense to keep your money where it will work hardest for you.

Finally, while it can be convenient to do all of your banking with one institution, don’t be afraid to choose separate banks for checking and saving if you find distinctly better deals for each at different banks.