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How checking accounts work

Ask a six-year-old how people get money. It makes us laugh when we see a comical answer on a test posted by an elementary teacher in our social feed. Even FamilyMint created a post about the funny comments kids make about money.

Youngster: "I'll bet you I'm going to get a new baby brother."

Adult: "How much will you bet me?"

Youngster: "Fifty dollars."

Adult: "Where are you going to get the money?"

Youngster: "At the machine at the grocery store."

As adults, you may privately think, “How does a checking account work?” You may not be able to provide a solid answer to your teenager, much less your younger kids. Possibly you know the gist of how your money moves, from direct deposit to your debit card, but what steps happen in between when you know you have the money, but don't actually see it?

Checking account comes with straightforwardly named features, like bill pay and transfer funds, but the details of those transactions may remain a mystery. When you get hit with an overdraft fee — surprise — you certainly want to avoid that happening again. Seeing how your money arrives in your deposit account, moves within your own accounts, and eventually leaves your account may help you feel a stronger sense of ownership when it comes to your primary financial resource.

 

Do you need a checking account?

In the age of digital banking, you may find yourself financially isolated if you don't have a checking account. Whether paying rent, automatically paying your favorite streaming service, getting paid by your employer, or placing an order online, you need to have a way to fund your purchases. (And even if you think you can put everything on a credit card, you still have to find a way to pay back that credit card debt eventually.)

So you open a bank account, and maybe a savings account, and you don't think about the importance of it once you have your debit card in hand and your direct deposit set up. Over time, you may attach your debit card to a half dozen apps, websites, insurance providers, and even your digital wallet. Your money can move in a dozen different ways on any given day and you may even consider it a triumph when you get to the next pay period and there is still money left over.

Many people use their checking account exactly like this: Money comes in, money goes out. Checking accounts are designed for moving money from point A to points B through Z. Unless you are earning interest on the balance, there may not be a need to keep any more money in your checking account than you need during each pay period. Whether dropping your money into your savings account, emergency fund, HSA, 401k, or even if you're investing in a little cryptocurrency, your money can go anywhere, but it's likely going to flow through your checking account.

 

EFTs are your BFFs

Whether incoming or outgoing, your checking account lives by Electronic Funds Transfer, or EFT. Your personal checking account includes two magical numbers: your routing number and your account number. The routing number matches up to your bank or credit union. It's not unique for your branch, but for the computer system, or core, that keeps your financial records. Your account number connects both directly to you, and to the specific account where the money is coming or going.

Here's how you can explain it to your six-year-old: The money has to find your account the same way the mailman has to find your house. The routing number tells the money where in the bigger area, kind of like your ZIP code. The account number narrows it down to the street and house number. 

In order to make sure you get your paycheck in your account, your employer uses your routing number and account number, and an EFT leaves your employer's bank account and finds its way to your bank account. We all love seeing money coming in.

Outgoing payments work a little differently. Your cell phone provider isn't going to give you its routing number and account number. Instead, you give your routing number and account number to Verizon, or AT&T, or T-Mobile, and you give them permission to take a set dollar amount from your account. They use an EFT to remove that amount from your checking account.

To explain it to your six-year-old, it's like their bag of Halloween candy. The neighbors put candy into the bag (deposits) and you reach into their bag and take out a piece (withdrawal) — preferably after they go to bed or when they are not looking. Maybe save this explanation for when they’re older.

 

Why aren't transactions immediate?

You've probably noticed that when you transfer money from your savings account to your checking account, it happens immediately, but when money is incoming, it never quite seems to get there fast enough. Likewise, when you go out to lunch on Saturday, the transaction doesn't show up until Monday.

When money moves within your own bank or credit union, such as when you transfer $100 from your checking account to your savings account, those funds don't leave the bank. They remain within the same routing number. When a debit (like a purchase with your ATM card) or a credit (like your tax refund) hits your account, the money is moving between different routing numbers, or different financial institutions. There may be a variety of automated, or even manual, processes that happen along the way depending on the EFT’s movement.

Also, if you are making a payment to a large retailer, such as Amazon or Walmart, all of those transactions get deposited by the retailer into an account, and each individual payment has to reach out to every routing number and account number and withdraw the exact amount of money you — and every other shopper — agreed to pay for your purchase. When you consider the billions of EFTs happening all at once, that's probably more than you'd want to try to explain to your child.

There may also be additional layers of movement besides just your account and the merchant's account. Payments sometimes move through a state bank that handles the disbursement of the funds to the merchant, or even a branch of the Federal Reserve. The movements are timed at intervals throughout the business day (but not on holidays), so depending on how many places the payment routes, and what time those transactions occur, they are not instantaneous.

With checks, especially hand-written checks, there are additional levels for review. This may include a process for confirming the spelled-out dollar amount matches the numerical dollar amount, that the signature matches the account owner, or that the routing and account numbers are correct. With mobile deposit, an uploaded check image from one night may not get processed until the next morning, and the funds may not become available until later, or even until the end of the business day. Mobile banking sometimes moves at the speed of business.

Try telling your six-year-old that they have to wait a day or two to eat their Halloween candy. They'll ask in shock, “Why do I have to wait?” But they aren't using their Halloween candy to cover the car payment. For you, it's worth a little time to make sure the money gets to the right account so you are correctly credited for your on-time payment.

 

Setting up your checking account

When you first opened your checking account, you wanted to get the best checking account for your needs. For example, if you keep just a minimum balance each month, you may want overdraft protection. Later in life you may have enough of a balance that you want to take advantage of a competitive interest rate on your checking balance. Maybe you want a single account to pay bills, and another checking account for you to pay bills jointly with another individual, like a student away at college or your elderly aunt.

A good rule of thumb when selecting and opening a checking account is to choose an account with minimal fees, such as one without monthly service charges, or to find an account that refunds ATM fees.

Setting up an automatic payment can be one of the most useful ways to keep those EFTs flowing. Automated payments allow you to put all the pesky, recurring transactions, like streaming service subscriptions, out of sight and out of mind. (And if you find yourself spread too thin, putting all of your monthly recurring payments on a single account can help you decide what you're willing to live without to save some extra cash.)

With those windows of time between when a transaction occurs at the store or the bill payment is scheduled until it reaches your account, it falls on you to keep an eye on your account balance, your payments, and fees that you may incur. Use your online banking or mobile app to schedule alerts so you know when those EFTs are headed out the door or landing in your account.

 

How checking accounts work for you

Over time, as you add new incoming credits and more outgoing transactions, especially automated payments, you may feel like you are locked into that one checking account, whether or not it's the right checking account for you. Not true! You can always change to a new account.

You may not have known what your future needs would be when you first opened your personal checking account. What used to fit your circumstances when you were paid weekly may be different now that you get paid monthly, especially if you have automated payments reaching into your account and pulling out those EFTs. Whether you’re adding a beneficiary or changing your student checking account into a joint account for you and your partner, you can always find a new checking account that works for you as your financial self-care changes.

 

Discover more ways to be proud of your money in our previous blog post, "Checking vs savings accounts."

Tags: My Finances, Rewards Banking, Banking