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MoneyRates Monthly Resolution #2: Direct Deposit Paychecks into Savings or Money Market Accounts

February 11, 2010

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

At the beginning of the year, MoneyRates.com published a list of 12 monthly resolutions for 2010, to give you bite-sized money-saving goals to work toward rather than a single New Year's resolution. Now that it's February, it's time for the second monthly resolution: directly deposit paychecks into savings or money market accounts.

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.

Three 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 to 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.

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