What Is Direct Deposit?

How Does Direct Deposit Work?

Direct deposit is an electronic transfer that uses the Automated Clearing House (ACH) system to pay employees. At the end of each pay period, your employer submits a direct deposit request, and that request initiates a transfer of paycheck funds to your bank account. You can choose to have your paycheck direct deposited into a checking account or savings account.

Using direct deposit can be a less tedious way to get paid since you don't have to deal with the hassles of waiting for a paper check and then depositing that check each payday. The electronic aspect of direct deposit can also come in handy on paydays when you're on vacation or not able to pick up a check in the mail or at the office. Plus, direct deposits may be a safer way to get paid since there's no physical check or cash involved that could be lost in the mail or stolen.

How to Set Up Direct Deposit

The process of setting up direct deposit varies by employer. In some cases, you have to sign a payroll document physically. In other cases, your employer might have an online portal where you can digitally set up direct deposit. Whether you fill out a document or sign up for direct deposit electronically, you may need to provide the following information:

• Your name
• Your financial institution's name
• Your financial institution's address
• The type of account you'll be depositing money into (checking or savings)
• Your account number
• Your account routing number
• The amount you wish to deposit

During sign-up, employers may give you the option to include multiple accounts on your direct deposit form to split up your deposit. For example, you could choose to send 20% of your paycheck to a savings account and then send the remaining 80% to a checking account. Another option could be selecting a flat amount to split into each account, such as $4,000 to a checking account and $1,000 to a savings account every payday.

Automatic savings deposits can help grow your savings for emergencies or big-ticket purchases, and direct deposit splits could also help you manage cash flow with a partner. If you share household expenses, you could each consider direct depositing one part of your paycheck to a joint account for shared bills and depositing the rest of the money into your own personal accounts for personal expenses.

How to Get Early Direct Deposit

Along with being a safe way to transfer money, direct deposits could help you get your money faster. Some financial institutions let you receive paychecks sooner by releasing funds immediately when your employer sends a deposit instead of making you wait for the payment to fully clear.

Financial institutions that have this feature could give you access to paycheck funds up to two days before payday. So, for instance, if payday is every other Friday, your paycheck could show up in your bank account on Wednesday. Below are examples of financial institutions that offer paychecks up to two days early:

• Ally Bank
• Axos Bank
• Capital One
• Chime
• Fifth Third Bank
• Huntington Bank
• PenFed Credit Union
• Regions Bank

The Bottom Line

Often, setting up direct deposit is one of the first onboarding steps when starting a new job. If you're currently getting paid by paper check and prefer to get paid electronically, try reaching out to human resources to see if using direct deposit is an option.

Once direct deposit is set up, it's also important to update the banking information whenever you change banks or close an account. Otherwise, if your employer tries to send a direct deposit to a closed bank account, your paycheck could be delayed. Aside from the minutes it takes to set up and the periodic updates it requires, direct deposit is a timesaving way to collect your pay.