Getting paid by direct deposit is definitely the way to go. Money that's owed to you gets electronically deposited into an account of your choice. It's simple! If you are a W-2 employee, you want your employer to pay you bi-weekly or monthly by direct deposit.
If you are a 1099 income-earner, you should also request to get paid by direct deposit as well, instead of getting a check in the mail.
Payments by direct deposit are also better than getting paid by Paypal or Stripe because there should be no fees involved. In addition, it feels great knowing that your check WON'T get lost in the mail.
In the old days, standing in line at the bank every other Friday waiting to deposit bi-weekly paychecks was a collective pastime. I remember doing so back in 1995. But no more! Your goal should be to get as many vendors to pay you by direct deposit as possible.
Why? It is easier, faster, and safe.
What Is Direct Deposit?
Direct deposit is a way to get your money automatically deposited into your bank account electronically. This means you don’t have to worry about going to your bank and physically depositing cash, checks, money orders, etc. It’s all handled digitally. And the money is sent straight to your account ready to use.
In addition to paychecks, you can elect to get a direct deposit from the IRS for your tax refund, your Social Security payments, your pension payments, and your freelance income payments.
As a small business owner since 2009, I've got 90% of my vendor payments made in direct deposits. However, there are still a couple checks that I still get in the mail, which is kind of a pain when I'm traveling for long periods of time.
How Does Direct Deposit Work?
A direct deposit works through the Automated Clearinghouse or ACH. It’s a system for moving money electronically from one bank to another.
The ACH is run by an organization called the National Automated Clearinghouse Association, or NACHA. It started in 1974 and is now one of the most popular and safest ways to move money around. In fact, the ACH is responsible for moving over $40 trillion every year between banks.
When you sign up for direct deposit, you’re agreeing to accept your payments via the ACH transfer.
According to the National Automated Clearinghouse Association, here are the steps that take place in an ACH direct deposit transfer:
- Your employer (vendor) puts in an electronic order with their bank to send you a payment.
- Your employer’s bank bundles together multiple orders from various customers and relays them to the ACH at regularly-scheduled intervals (such as once per day, at the end of the day).
- The ACH sorts these orders and forwards them to your bank, much like how the post office works.
- Your bank takes that order and credits your bank account with the amount listed on the order.
As you can see from the instructions, it the ACH transfer isn't instantaneous. You will usually have to wait at least 12 hours before money hits your bank account through a ACH transfer. Therefore, prepare accordingly.
How to Set Up Direct Deposit
Roughly 80% of employees get paid via direct deposit. The process is pretty straightforward and if you ever get confused, ask your Human Resources department for help.
The basic steps are as follows:
1) Fill Out A Simple Form
Most employers have a form you can fill out to set up direct deposit. You should get one when you first join your firm. If your employer doesn’t have a form, you may also be able to get one from your own bank. You’ll need to submit this form to your employer or whoever is sending you money.
The direct deposit form generally requires a few things:
- Your bank’s name
- Your bank’s address
- Your account number
- Your bank’s routing number
Think of the routing number and account number as an address for your bank account. Your account number is your own individual checking or savings account number. See below for an example:
2) Submit the Form to Your Employer
Once you fill out the direct deposit form, you will likely have to submit a voided blank check with the form. Write VOID across the check and cross the word out to ensure it can't be used.
The voided check is used to verify your routing and account number, given some employees mess it up.
Once you submit the information, ask your employer what days of the month and what time of the day will you get your automated payments. It's good to know for cash flow planning.
Commonly Asked Questions
Here are some of the most common questions people ask about receiving a direct deposit you might also have as well.
1) How Long Does A Direct Deposit Take?
An ACH transfer usually happens within 24 hours once the payment is initiated. However, banks generally don’t operate on weekends or holidays, so that may delay your direct deposit time further.
If the 15th is on a Saturday, you should generally be paid on the Friday the day before. If the 15th lands on a Sunday, you will likely get your bi-weekly direct deposit also on a Friday, the 13th.
2) Is Direct Deposit Safe?
Yes, a direct deposit is much safer than a check in the mail because there's a clear record and the direct deposit can't easily get lost.
The ACH is one of the biggest payment processors in the world and simply can’t afford to lose people’s faith and confidence in them.
After all, even the federal government mandates that some government benefit payments, such as Social Security, be paid out electronically, including by direct deposit.
3) What Are Other Benefits Of Direct Deposit?
First, receiving money via direct deposit is safer. Second, it's usually faster. Third, you have more flexibility on receiving money from anywhere in the world. Fourth, your banking institution keeps all records. Fifth, if you're traveling for months, like I do sometimes, you don't have to worry about a check sitting in your P.O. Box and then expiring.
Finally, you may also be able to split up your paycheck and send it to different accounts for automatic savings e.g. 50% to your checking account and another 50% to your savings account.
But that's kind of cumbersome. Simply transfer your money yourself once it all hits.
4) What Are The Negatives?
Honestly, I can't think of any. It is nice to be able to hold a check in your hand and take a picture of it. When I got a large vendor payment by check once, it felt amazing to hold so much. But I'd much rather prefer receiving a direct deposit.
5) How Much Does It Cost?
Direct deposit should cost you nothing to receive payments. Your employer, on the other hand, may have to pay to be able to send direct deposit payments. But that's just a normal business expense.
The NACHA estimates that each direct deposit payment saves businesses up to $3.15 per payment, versus writing a paper check. If you have an employer who charges you to receive a direct deposit, find another employer immediately!
Direct Deposit Is The Way To Go
As more and more people become freelance workers or get freelance jobs, it's good to keep encouraging your vendors to pay via direct deposit. Eventually, vendors and employers will all go paperless, but it takes employees and contractors to make it so.
Once you've got your direct deposit set up, it's imperative to aggressively save and invest as much money as possible. You don't want to work forever.
Your goal is to accumulate enough after-tax passive income streams so you have more flexibility in your life. You can't withdraw from your 401(k) or IRA before age 59.5 without a 10% penalty, so it's all about setting up as much non-retirement investment income as possible.
Finally, you should diligently keep track of your finances with a free tool, like Personal Capital. I've been using Personal Capital to track my net worth, manage my cash flow, and analyze my investments for excessive fees since 2013. As a result, I've seen my net worth skyrocket since. That which can be measured can be optimized!
Getting head financially is all about leveraging free technology and keeping records. If the direction is correct, sooner or later you will get there!