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Direct deposit into savings or checking?

April 09, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Q: My new job requires that I have my pay deposited directly into a bank account. Does it make more sense to deposit my pay into a savings account or a checking account?

A: As with so many banking questions, the answer to this depends on the circumstances of your situation. There is no single right answer that applies to everybody. Ideally, you would deposit pay into savings, but here are some factors that could determine whether that approach would work for you:

  1. Do you expect to have money left over at the end of the month? It's important to save money if you can, so having your pay deposited into a savings account would be the most efficient way of making that happen. However, given how low interest rates on savings accounts are these days, the benefits of having direct deposit go into a savings account may not outweigh the drawbacks (which are discussed below) if you are going to be living paycheck-to-paycheck, with no money left over.
  2. Does the checking account require a minimum balance to avoid a monthly maintenance fee? Unless you have a free checking account, your bank may require you to keep a certain minimum balance in your checking account to avoid paying a monthly maintenance fee. According to the latest MoneyRates.com Bank Fees Survey, these fees average $12.26 per month, or just over $147 a year. So, if having your pay deposited into checking helps you avoid this kind of fee, it may be worth more than the interest you would earn by having your pay deposited into savings.
  3. Are you confident in your ability to avoid overdrafting the checking account? The MoneyRates.com fee survey found that overdraft fees recently rose to an average of more than $30 per occurrence. It's best to opt out of overdraft protection, but if you need your pay directly deposited into checking to avoid overdraft situations, this could make more sense than repeatedly paying a $30 fee.

People have a tendency to deposit their pay into checking accounts, and then periodically transfer any accumulated money into savings accounts. However, a better saving strategy would be to have your pay deposited into your saving account, and then transfer a budgeted amount into checking to meet your expenses. This would maximize the interest you earn by getting your money into the savings account sooner, and perhaps more importantly, this method would help you put savings first, and have money available for spending only according to a budget.

So, as long as you can avoid a checking account fee and keep your spending within budget, depositing pay into a savings account would be preferable.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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