Direct Deposit is the Way to Go

Posted by Mike Smith :: May 13, 2008 @ 6:04 am

Sometimes it’s the simplest changes to our finances that can have the most dramatic effect. One such change is using direct deposit for your paycheck.

Nearly all jobs now offer the option of having paychecks direct deposited into your bank account. Many even require direct deposit. Using direct deposit forces you to pay yourself first. Unlike cashing a paycheck, spending what you need, and saving whatever is left, direct deposit lets you save as much as possible. This happens, in part, because we are lazy. Just like we save less when we have to take action to do so in the case of a physical check, we save more in the direct deposit case because it requires no additional effort.

If you are already using direct deposit, you can still make improvements in how you do so. By using a secondary account, such as a savings account or direct banking account, you can specifically mark a portion of your deposit for savings. Some employers will be happy to split your direct deposit into multiple accounts to make this process easier. If not, you can set up a recurring transfer to move a portion of your direct deposit amount every time you get paid. By using a secondary account, you make it even more difficult to borrow money from your savings. Instead of having to withdraw the money to spend it, you have to transfer it to a primary account (which might even take a few days in the case of a direct banking account) and then withdraw the money to spend it. This extra step may be all the incentive you need to resist impulse spending and save more.

While you may not need to use a secondary account to protect your money from your desire to spend it, doing so may also offer psychological benefits to see your savings grow. Making a simple transition to direct deposit or improving how your existing direct deposits are handled requires minimal effort but can have very positive effects on your finances. Take the time to review your current situation to see if you could benefit from this easy tip.