How does direct deposit work — a teens’ guide to getting paid

First job? Check. First paycheck? Check. Direct deposit? We’ve got that covered. If you’re a new worker or looking to start working soon — you’ve likely heard of direct deposit at least once. But how does direct deposit work? 

Well, considering that 93% of workers now use it, you can say that direct deposit is the most common way of getting paid. Let’s jump into what direct deposit is, how it works, how you can set it up, and its pros and cons. 

What is direct deposit?

The old-school way of getting your paycheck is with a paper check. Your company either hands you a check on payday or it arrives in the mail on or around your payday. You then have to go to the bank and deposit the check. Some banks are more advanced and have a mobile app where you can deposit the check.

Depending on the check amount, how long you’ve had your account, and other bank rules, your financial institution may put a hold on the check. If your bank does this, you’ll have to wait a day or multiple days for your hard-earned cash.

But with direct deposit, your company deposits your net pay — your paycheck amount after taxes and other deductions — directly into your bank account. The only thing you’ll receive from the company on payday is a pay stub, which shows your gross pay, your net pay and the amount of income, and other taxes and deductions that were taken out. 

How does direct deposit work?

After you set up direct deposit, your virtual paycheck will head to your bank a few days ahead of your payday. These funds go through the Automated Clearing House (ACH) — how banks send each other funds electronically — using your bank account routing number and account number.

When your bank gets the funds, it holds them until your payday. When payday arrives, you get your cash immediately, so you don’t have to wait for a paper check to clear your bank account before accessing your cash.

You can sometimes break up your direct deposit across several bank accounts. For example, you can put $100 into a savings account every payday to help automate your savings, and you can put the rest in your main checking account to use for purchases, like any essential costs, like gas or your phone bill — or a weekend out with your friends.

How to set up direct deposit 🏦

You can set up direct deposit by asking your employer for a direct deposit form or going online to access an electronic direct deposit sign-up form. (Each company will have a different type of form.) 

Then, fill out the form, which will typically ask for:

• Your name

• Your address

• Your bank’s name

• Your bank’s address

• Your bank’s routing number

• Your bank account number

• The percentage of your paycheck you’d like to have deposited in each bank account

When you submit a paper form, you may need to sign and date the bottom and attach a voided check. You can void a check by using a pen or permanent marker to write “VOID” in large letters across the entire face of a blank check, leaving the numbers on the bottom of the check visible.

Finally, submit the paper form to your boss or the human resources department. Or, with an online direct deposit form, simply click the “Submit” or similar button after entering your personal and bank account information.

What is a routing number and account number?

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Every bank account — checking and savings accounts — has a routing number and account number. The routing number is a nine-digit number and is exclusive to your bank. It is like a numerical identifier for your bank — they all have one. 

The account number identifies your specific bank account. The number of digits will vary by bank. 

The routing number combined with your account number is what helps guide money through the ACH system and to your bank account — instead of someone else’s account. 

Where can I find my bank account and routing numbers?

Finding the routing number and account number for your bank account is simple if you have checks. On the bottom of each check are three series of numbers. The first nine digits make up the routing number. The second series of numbers make up your bank account number — the number of characters making up an account number varies by bank.

You’ll see a third series of numbers on your check, which follow several dots. This is the check number, and you won’t need it for direct deposit.

If you’re like most teens and don’t have checks, you may be able to find your account and routing numbers on your online banking app or website. Check in areas such as “Account Information,” “Account Settings,” or “Account Details.” If you still can’t find your routing number and account number, you can call your bank’s customer service number to get this information.

You can also look at your bank account monthly statement for your account and routing number. Not every bank puts the full number on your statement — some characters may be disguised — but it may be another option for finding these numbers. 

You can also use your routing and account numbers for paying bills via ACH. So, keep these numbers handy.

How long does direct deposit take to go into effect?

The waiting period for your direct deposit to start can vary depending on your employer’s payroll provider. Some may take only a day, ensuring your first paycheck goes directly into your bank account without issue. However, others can take a few weeks, meaning you may have to process at least one paper check before your direct deposit kicks off.

What other payments can you get via direct deposit?

We focused on paychecks here, but this isn’t the only payment you can set up for direct deposit. Some other payments you can get via direct deposit include Social Security benefits, disability payments, income tax refunds, and retirement benefits.

What are the benefits of direct deposit?

If direct deposit is available, you have many reasons to opt in. Here are some of the key benefits of taking advantage of direct deposit.

You get your cash quicker.

The key benefit to direct deposit: You get your cash on payday and don’t have to process it or wait for the check to clear. So, on payday, you can swipe your debit card with confidence, knowing your paycheck is available and ready to use.

It can be a greener option.

Getting paid doesn’t require paper if you opt for direct deposit and electronic delivery of your pay stub. This means no trees get cut down just to send you a paycheck, making direct deposit with paperless pay stub delivery a green option. Plus, there’s no need to drive to the bank to deposit your check, avoiding the emissions your car releases during the drive.

You may get extra perks at your bank.

Some banks offer extra benefits for setting up direct deposit into your account. These perks can include a higher annual percentage yield (APY) — the interest you earn on the money in your bank account — or a cash sign-up bonus.

You can avoid bank fees.

Some banks still charge maintenance fees for having an account open with them. However, they often waive these fees if you meet certain requirements. One such requirement is sometimes having a certain amount of money directly deposited into your bank account monthly.

It can help you avoid overdraft fees.

Because you know when your cash will hit your bank account, you can set up bill payments and know you won’t overdraft your bank account when you have direct deposit. With a paper check, you risk overdrafting your account if the check takes an extra business day to clear.

You don’t risk losing or damaging your check.

It happens... you could accidentally misplace your paycheck or spill a drink on it and ruin it. Then, you gotta go through an entire process of getting a replacement check. This can be a tedious process.

With direct deposit, there’s no paper check to damage. You could damage or lose the paper pay stub, but you can always request a new one. Sure, you’ll have to wait for that, too, but when was the last time you needed your pay stub immediately?

There are no deposit limitations.

When depositing a physical check, some banks limit the amount you can deposit via their mobile app. With direct deposit, there are no limits. So, whether you’re depositing $10 or $10,000, it all goes through without a hitch.

There’s no fear of a bounced check.

Bounced checks happen, even from a large corporation. With direct deposit, the bank verifies the funds before they’re sent to you, so there’s no risk of a bounced check. This also means you won’t get hit with a bounced-check fee on any checks you’ve written.

It’s typically free for the payee.

When you receive a direct deposit, it is generally free for the payee and payer alike, so you keep more of your cash. This is different from a wire transfer, which can cost $15 to $45 for the payer and the payee. Some banks allow free incoming wire transfers, but not all.

It can save business owners money.

Direct deposit often saves business owners money because they don’t have to print and mail out paper checks. They can then apply the savings toward other employee costs or benefits. 

You can automate your savings.

Saving money is critical to building a solid financial base, and direct deposit can ease this process. Since you can split your direct deposit across several bank accounts, you can automatically send a fixed percentage or dollar amount of your paycheck to a savings account. This prevents you from having to remember to transfer the cash.

You don’t need to worry about when the bank is open.

Between school, work, and extracurricular activities — you're busy, which means your bank’s hours may not mesh with your schedule. In addition, banks usually have deposit cutoff times.

For example, your bank may be open until 5 p.m. but have a deposit cutoff time of 2 p.m. This means that any deposits made before that time will be added to your account the same day.

However, if you deposit a check after that time, the money won’t be available in your account until the next business day or later. You might have to wait a few days if you deposit your check after the cutoff time on a Friday, meaning you won’t have your money until after the weekend.

Luckily, with direct deposit, there’s no need to think about bank hours or cutoff times — your cash is just there.

What are the drawbacks to direct deposit?

We covered the numerous benefits of signing up for direct deposit, and we had a lot to cover. However, direct deposit isn’t without its drawbacks. Here are some of the downsides of direct deposit.

It adds a step when switching your bank or credit union.

Once you set up direct deposit, your check will automatically go into your account until you change it. However, if you change banks, you must go through the entire sign-up process again, including the waiting period. This adds another step to the process of changing banks.

But ultimately, don't let the extra step discourage you from participating in direct deposit. Just be aware of it if you do happen to change banks.

You may need a parent’s help setting up a bank account.

If you’re under 18, you’ll need a parent’s help setting up your bank account, as financial institutions won’t allow someone under 18 to create their own account. Finding time to bring your busy parent to the bank to sign up for an account can be difficult, making the sign-up for direct deposit that much harder. 

Greenlight tip: With the Greenlight app, your parents can help you sign up and enroll in direct deposit in no time.

Technical glitches can impact your pay.

Glitches could happen — even in something as secure as banking software. If this glitch impacts your direct deposit, there could be a delay in getting your funds. These glitches are very infrequent, so don’t let this stop you from enrolling in direct deposit. 

The other downside is if you’re used to getting your pay on a certain day and time, but it doesn’t arrive, you may use your debit card out of habit and overdraft your account.

To avoid an overdraft on your account, it's good to get in the habit of checking your account on payday just to make sure your money was delivered as expected. Pay extra attention with the first deposit and after any changes to your pay or benefits. 

Inaccurate information can delay the process.

Waiting several business days or weeks for your direct deposit to activate isn’t a big deal. However, if you mix up some information and give your employer incorrect bank details, this can further delay the process.

As long as you double-check your information when entering it on the direct deposit enrollment form, you can minimize the risk of this happening. No need to forgo direct deposit out of fear of this mistake. 

Your employer could change payroll providers.

You’ll have to set up your direct deposit into your new account and wait if you change bank accounts. That’s 100% in your control. What’s out of your control is if your employer changes payroll services, leading to you having to re-enroll in direct deposit with the new provider and potentially dealing with a waiting period.

While it may seem like a headache to go through the enrollment process again, re-enrolling in direct deposit sure beats having to rush to the bank every payday between school and work. 

You will pass sensitive information along to your employer.

When you fill out a direct deposit form, you pass on sensitive information, including your bank account and routing numbers. If someone steals this information, they will have access to your bank account and the funds within it, especially if it’s a paper application and the company mismanages your documents.

However, even an electronic direct deposit enrollment form has risks, as hackers can access the database and get your information. 

Whichever way you enroll, just keep an eye on your account and report any suspicious activity.

Greenlight can help you manage your income and save 💰

Now that you know the answer to “How does direct deposit work?” You also understand that direct deposit has numerous benefits but only a few drawbacks, making it a great option for most people.

With the ability to split your direct deposits between multiple accounts, you can put part of your pay in a checking account for daily spending and the rest in a savings account for future saving goals. This can include saving for your first car, a new bicycle, the latest gaming console, or whatever you’ve set your sights on.

Ready to learn about the world of money? Sign up for Greenlight today! You can send your paycheck right to your Greenlight account and debit card and earn cash back to Savings when you use your card to make purchases.

Greenlight is a financial technology company, not a bank. The Greenlight app facilitates banking services through Community Federal Savings Bank (CFSB), Member FDIC.