Banking: Managing Your Checking Account
By Amy Fontinelle
Because your checking account is the nexus of all your banking activity - the main place that your money flows in and out of - you'll need to do a few things to keep an eye on your money and avoid problems.
Balancing Your Checkbook
The most basic way to manage your checking account is by balancing your checkbook, which is nothing more than recording the dates and amounts of all your withdrawals and deposits so that you know how much money is available to you at all times. This is important because between the time that you write a check and when the recipient deposits it, you might forget all about it and end up overdrawing your account and incurring unnecessary fees.
In the age of electronic banking, checkbook balancing is not as straightforward as it once was - most people have money entering and leaving their accounts through methods other than writing and depositing traditional paper checks, such as direct deposits from an employer and ACH transfers to pay your bills online. It's also important to keep track of these transactions in your checkbook. Further, you'll need to remember to record debit card purchases and ATM withdrawals, so keep your receipts from these transactions and enter them at the end of every day. Then, at the end of every month when you receive your account statement, check all of the transactions on your statement against your checkbook entries to make sure that everything matches and there are no omissions or mathematical errors. When everything matches, your checking account is considered "balanced". (It's important to keep a handle on your finances, even if your spouse does the accounting. Read Why You Shouldn't Let Your Partner Do The Books to learn more.)
If you're not willing to make the effort to balance your checkbook, keep a large cushion in your account to prevent overdrafts and monitor your balance daily. If you're signed up for online banking, it only takes a minute a day to stay on top of your account activity.
Online banking allows you to use a computer with an internet connection to access your accounts through a secure, password-protected online system. Via online banking, you can check your account balances, move money between accounts and pay bills electronically. Online banking allows you to access your account from anywhere in the world, any day of the week, at any time of day, and as often as you want. Plus, it's almost always free.
If you're going to bank online, it's essential that you use safe internet practices to protect your account information from hackers and thieves. We'll go into this in more detail in Chapter 9. (To learn more about internet banking, check out Online Banks: Lower Cost And Little Sacrifice.)
Once a written check has been deposited, it becomes a canceled check. In the past, banks would return canceled checks to their customers, but nowadays it's more common to get an electronic printout of your canceled checks with your bank statement or to view and print your canceled checks through online banking.
Bounced Checks/Bad Checks
Balancing your checkbook and monitoring your balance online can help you avoid bouncing checks. If you write a check for a higher amount than what you have in your checking account, it's considered a bad check and it will "bounce", meaning that the person or business you wrote the check to won't get any money. You'll still be on the hook for what you owe, but you'll now also owe that person or business for the bounced check fee that their bank probably charged them (usually around $25). Also, your bank will charge you a non-sufficient funds (NSF) fee for not having enough money in your account to cover the check.
Getting an account with overdraft protection can eliminate the problem of bounced checks. However, it won't necessarily eliminate all of the fees associated with writing a bad check. (For more insight, see The Ins And Outs Of Bank Fees.)
If your checking account has overdraft protection, your bank will pay any checks you write that exceed your account balance (up to a certain amount) and charge you a hefty sum for the privilege in the form of an overdraft fee. This fee will be charged on each and every check you write that exceeds your balance, no matter how large or small the amount of the check. This means that if you have $2 in your account and write a check for $5, you can get slapped with a $39 overdraft fee.
Two alternatives to the bank's overdraft protection are to keep a cushion in your account - a sum of money that you never use to pay bills but keep around to prevent bounced checks and overdraft fees. You could also link a savings account to your checking account. Some banks will waive overdraft fees when your checking account balance is insufficient to cover a check as long as they can obtain the necessary funds from your savings account. Bear in mind that you may still pay a lesser "overdraft transfer fee" for each occurrence.
Waiting for Transactions to Post to Your Account
When you withdraw cash from an ATM, your account balance will update immediately to reflect the change. Many other types of checking account transactions will not post to your account immediately, however. Some common examples where there is a lag period between the time you initiate the transaction and the time the funds appear in or disappear from your account include the following:
- Depositing a Check
Deposits aren't always available for immediate use.
- Writing a Check
If you write a check at a store, many stores now have the technology to convert your check to an electronic funds transfer and debit the money from your account immediately. However, if you write a check to your niece for her birthday or send a check in the mail to pay a bill, there will generally be a lag time of at least several days between when you write the check and when the money leaves your account.
It's important to be aware of this so that when you check your account balance, you don't think you have more money than you really do. Sometimes, people will hold onto checks for so long that you'll forget about them - unless you've been balancing your checkbook, that is. Also, purchases made with your debit card won't always show up right away.
- Initiating an ACH Transfer
If you transfer money electronically between financial institutions (for example, to pay a credit card bill from your checking account through the credit card company's website or to transfer money from your checking account at the bank to your retirement account at a brokerage firm) it can take several days for the transaction to post to your account. In addition, the two sides of the transaction won't necessarily post at the same time; the money may disappear from your checking account before it appears on your credit card account, for example. Whenever you initiate an ACH transfer, read the fine print about how many days it can take for the money to move.
Unlike in Monopoly, if the bank commits an error in your favor, you should not spend the money. The bank can charge you with theft if you do. This may seem unfair since it was the bank's mistake, but when you look at it from the standpoint of spending money that isn't yours, the theft charge makes a lot more sense.
If extra money somehow ends up in your account, notify a bank supervisor immediately and leave the extra money alone. If your contact with the bank supervisor is in person or by phone, you would be wise to back up this interaction with a letter so that you can provide documentation of the issue later if needed. Even if the money remains in your account for years, the bank could finally figure out its error one day and take it back. Of course, you can still spend whatever money in your account is rightfully yours.
If the bank makes a mistake that is not in your favor, such as losing your deposit, what should you do? The first step should be to bring the problem to the bank's attention, keeping in mind that if the first bank employee you talk to isn't helpful, you should try talking to others and even escalating the problem to management. If this isn't successful, try bringing in the big guns. One option is to contact the Office of the Comptroller of the Currency, a division of the U.S. Treasury entrusted with "ensuring a safe and sound national banking system for all Americans." Make sure to act quickly, because federal law limits the amount of time you have to report the error to your bank to 60 days from the date the bank statement showing the error was sent. Of course, you'll probably notice the error much sooner and want your money back right away, so the 60-day window shouldn't pose too much of a problem.
Next, we'll talk about your options for setting aside extra money for a rainy day or a special occasion and helping it grow in the meantime.
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