4 Ways Direct Deposit Can Help You Build Better Financial Habits

Contents

Makes Saving More Consistent Reduces Temptation To Spend Makes It Easier To Budget Makes It Easier To Build Credit

Direct deposit is more than just a convenient tool that lets you get paid sooner than if you were to stick with getting physical checks. It’s also more secure, and going paperless is better for the environment, too.

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And then there’s the automation, which can help cut down on missed or late payments and overdrawn accounts. In many ways, direct deposit can help you build better financial habits. Here’s how.

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Makes Saving More Consistent

When you set up direct deposit, you can have your entire paycheck go straight to your checking account. Depending on your employer, you may also be able to split your paycheck across multiple accounts. You can generally do this based on a percentage or dollar amount of your earnings.

For example, say you want to save 20% of your monthly income. You can ask your employer to deposit that amount into your savings account and the rest into your checking account. You might need to fill out a direct deposit form for this, but once that’s done, you’re good to go.

And if you don’t want to do it based on percentages, you can always do it based on a fixed dollar amount. This could be $50 or $500. Just choose an amount that works with your budget.

Using direct deposit in this way can be a major benefit if you want to save money, but have trouble consistently setting aside funds each month. No longer will you have to manually transfer money from checking to savings. Everything is automated, so you can essentially “pay yourself first” with every paycheck.

“If you’re looking to build better money habits, start with direct deposit. This simple step can give you more control and clarity over your finances so you can budget, save, and plan for the future,” said Nischay Rawal, a CPA with NR Tax & Consulting.

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Reduces Temptation To Spend

Once you start practicing the “pay yourself first” mentality, you can also cut down on the temptation to spend when you could have saved. When you allocate some money into savings with direct deposit, you won’t have the funds readily available in your checking account.

This not only encourages saving more, but it also helps you build discipline over time as you get used to not spending quite as much. In the long run, you’ll also have much more money (in savings) that you can use for other things, like buying a house or emergencies.

Makes It Easier To Budget

As Rawal pointed out, direct deposit can also make it easier to budget. With it, you always know when your money is going to be deposited into your account. Sometimes, you’ll even get paid earlier than expected. This makes it easier to plan your expenses and track your money throughout the month.

Knowing you have the funds can alleviate some financial stress, especially if you live month to month, as is the case for roughly 78% of Americans according to Payroll.org data. Not only that, but knowing the money is there can make it easier to budget, pay your bills on time and eliminate late fees. You might even be able to schedule out payments in advance since you know the money’s there.

“The automation helps establish a routine, so [people] always know funds will be available to pay bills on time,” said Rawal. “This has led to fewer late fees, lower debt, and improved credit scores for many.”

Makes It Easier To Build Credit

Through a combination of building better money habits, giving you greater clarity over your finances and automation, direct deposit can even help you build credit. There are two main ways this can happen:

Reduces late or missed payments: Payment history makes up 35% of your FICO credit score. Missing even one payment can cause a ding on your credit. With direct deposit, you’re less likely to miss an upcoming payment.
Streamlined payments: Through either automating or scheduling your payments in advance, you can also avoid late fees and damaged credit.

As an added bonus, combining direct deposit with overdraft protection can eliminate those pesky overdraft or nonsufficient funds (NSF) fees. Considering overdraft fees can easily cost about $30 per transaction, this can be huge.

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