Direct deposit: how it works

Most of us have accidentally lost a paycheck, through carelessness, a mail glitch or a pair of uninspected pants tossed too quickly into the laundry.

There is an increasingly popular solution to the problem of lost checks: direct deposit.

The benefits of direct deposit

• There are no checks to be lost or stolen. • Payments reach your account the day the check is issued -- even if you are out of town, sick or unable to get to your financial institution. • Many banks offer free or lower-cost checking for customers with direct deposit because it saves them the cost of processing paper checks. • Direct deposit can help you avoid bouncing checks because the deposit is direct and on time. • It can save you trips to the bank and help you avoid long lines at tellers or ATMs. • The federal government and many employers will deposit your check a day early if the regular payday falls on a holiday.

One downside to direct deposit

If you are trying to protect your wages from being garnished or from another person who has access to the account, go with cash or a paper check.

Setting up direct deposit
Establishing direct deposit of your paycheck requires you to go through your employer, who will have the paperwork needed to set it up.

Your employer will want your Social Security number and a voided check from your checkbook containing your bank's routing number (a number assigned by the Federal Reserve to identify your bank) and your account number.

The routing number is the first set of numbers on the bottom left of your check. The routing number is followed by your account number and the number of the check itself.

The voucher system
It may take a pay period or two for direct deposit to kick in. After it does, instead of your regular paycheck, you will receive a voucher from your employer stating how much was deposited to your account. The voucher will look similar to a real check, with all the same information on taxes, benefits and other deductions, that were on your paper paycheck.

Arranging direct deposit of most federal paychecks may be done over the phone or at your local federal building. The agency -- whether it's Social Security, Veterans Administration or some other branch -- will need your checking account number and your bank's routing number. You will get a follow-up letter confirming the change in your method of payment.

You will not, however, get a voided check or voucher each month. Federal payees must call their banks to verify direct deposit of their checks.