Checking Accounts

Let's take a moment to understand the role of financial institutions in managing your checking account.  If you
are one of the people wants to avoid a checking account, you are an idiot.  If you are one of the people that
can't manage a checking account you can learn.  Life is generally easier with a checking account for a number
of reasons, the first of which is Direct Deposit and the second of which is no having to carry cash.  Yes, cash is
wonderful and can be used everywhere and that is a good reason to only use cash but there are times when
cash is a problem, like when you lose your wallet or it is stolen.  If you lose your wallet, you can either lose your
cash or you can lose your debit card.


Direct Deposit
Repeat, over and over again: Direct Deposit.  Why would anyone ever want to pay someone else to cash their
paycheck?  Most check cashing services charge anywhere from $3 - $10 to cash a paycheck.  But here is the
interesting part – you can have the net amount of your check deposited directly into your checking account
without doing anything.  Just sign up for Direct Deposit with your employer payroll service and each pay period,
the money will magically appear in your account.

Not only does this service cost nothing, but you never need to worry about getting to the bank to deposit the
check, you never need to pick up your check when you are on vacation, you can't lose the check.  If you
normally get your check on Friday, the money is deposited into your account first thing in the morning on
Friday.  

Why is this important?  Simple – it saves time and effort and gives you one less thing to worry about so you can
concentrate on the more important things.

Everyone is familiar with banks or credit unions in buildings on the corner of intersections or on Main Street.  
These are known as 'brick and mortar' financial institutions and offer the most services, including tellers and
bank associates.  Inside the building, the most notable feature is the tellers, providing face to face transactions
and problem resolutions, next you will likely see an ATM (Automated Teller Machine).  Also available are a wide
range of other people who are there to assist in providing other services, ranging from opening new accounts
to applying for loans, to services directly related to handling and processing money.  

The development of the Internet has opened a whole range of options when it comes to banking functions.  
Currently a number of financial institutions have opened an on-line presence and can provide many functions
similar to the brick and mortar buildings on the corner except for the face to face interaction.  As noted earlier,
make sure your financial institution is insured by the government.  

Let's start with some of the services.


SAVINGS ACCOUNTS
All financial institutions provide the option of opening a Savings Account.  A savings account is a very easy way
to save money.  The account has no services associated with it and pays a limited interest, but is easy to use.  
In this case, interest is where the bank pays you a minimal amount of money for letting them store your money.


CHECKING ACCOUNTS
Checking accounts are provided by most major financial institutions.  A checking account is a method for you to
manage your money without keeping the money in cash.  A checking account is named because you have the
ability to generate checks.  Checks are referred to as restricted negotiable instruments because the check is
made out to a particular receiver and no one else should cash the check.  The check provides a means for you
to provide payment to someone without actually using cash.

The amount of money that is in the account is referred to as the account balance.  The money that is in the
account that you can spend is known as 'Cleared Funds' because the funds have no restrictions and you can
use them however you wish.  Money that you place in the bank may go through status changes before being
'Cleared Funds'.  If you deposit a check, the dollar amount is not considered as 'cleared funds' until the bank
has received the money from the other bank.

Checks are very easy to use and, most importantly, have a visual impact when the money is spent.  When a
check is written, the date, the amount and the payee should be stored in the 'check register' and a running
balance for the account should be calculated.  This visual impact will help insure that there is always a balance
in the account to pay for the checks that have been written.  The use of a check register is critical to
understand and implement because the proper use of a check register will insure that you never have an
overdraft.  

Banks provide a number of services, but one of these is not to 'honor' the check for the payee when you don't
have sufficient cleared funds (honor the check means to fund the check and provide payment to the payee
from your cleared funds).  When you spend more money than you have in cleared funds, this is known as an
Overdraft and can be very expensive and embarrassing.  Banks have two choices when a check comes in that
exceeds the cleared funds:

      -        they can pay the check and charge you a LARGE fee, or
      
      -        they can return the check to the person that deposited it.  So if you write the check to the grocery
store, the check will 'bounce' (be returned from the bank) and the store will often call, requiring you to come in
and pay for the check but also pay a large processing fee (plus the fee from the bank for returning the check).


ATM / DEBIT CARDS
There is nothing more convenient than ATMs (Automated Teller Machine) and Debit Cards.  In today's world of
banking services, you can go up to a bank machine, insert a debit card, ask for money and get it.  Life doesn't
get any better.  With a debit card, there is also the option of walking into almost any retail outlet in the United
States,  so you can select merchandise, walk up to the cash register, slide the debit card through the slot and
walk out with the merchandise.  Here's the sticky part, every time you use your debit card, your cleared funds
balance drops.  Not surprising, there are people that think if they pull money out of an ATM, it is free money.  
This is wrong, there is no such thing as free money, always enter into your check register.

While these technological advances provide an incredible jump in convenience, they also provide the highest
potential of over spending.  Financial institutions make money on checking accounts from two primary sources;
1) charging retail outlets a fee for processing debit card transactions and,  2) collecting fees from banking
customers for over drafting their accounts.  On the flip side, financial institutions can save money when you use
an ATM or debit card instead of visiting a teller or writing a check.

One of the most difficult lessons to learn in financial money management is buying what you plan on buying and
not buying just because it is convenient.  The second lesson to remember is that transactions using an ATM or
debit card reduces your cleared funds balance and uses some of your money.  The check register that is used
for your checking account can also be used to track ATM transactions and debit card transactions (it's all
money from the same account).  Keeping all this information in one place will help to make sure that you know
your account balance at all times.  Yes, there are apps for your smart phone.


RECONCILIATION OF ACCOUNTS
While both checks and the ATM/debit card allow you to access the funds in the financial institution that belong
to you, it is your responsibility to review all the transactions that impact your account and discuss any problems
with the financial institution.  This process is referred to as 'reconciliation'.  This is a simple process where you
compare the transactions listed in the check register against the transactions listed in the account statement.  
Financial institutions normally provide a monthly paper statement of checking accounts showing all deposits,
withdrawals, and fees charged to the account, along with the account beginning and ending balance.

While this process may seem like a pain, it will insure that all of your transactions have been properly recorded
and transactions that may not be yours can be reviewed.  It is possible that a transaction was charged to the
wrong account and this will affect your available balance.  

Additionally, most financial institutions provide access to account information through the Internet, so the
process of reviewing the transactions that have cleared the account and those left out, can be performed more
often than once a month.


CHECKS – WHAT REALLY HAPPENS
Ever look at a check?  Let's go through the format in detail.

Start with your name, address and phone number.  Your can order the checks without the address and phone
number, but you should always have your name on the check.  In today's world, the use of the check is more
and more limited, but still has uses.  Most retail establishments may take checks but they also have credit /
debit card processing.  Checks are valuable when you want to pay for something through the mail: utility bills,
credit card payments, loan payments, renewals, etc.  The nice thing about a check is the fact that the check
itself becomes a form of documentation.  This becomes clearer as we follow the path of the check.

Next is the bank ID number and this isn't used by many people.  However, if a business has a lot of checks to
deposit, they are often listed on the deposit slip with the bank ID number and the amount.  This way, it is easy
to find the mistake if the wrong amount is entered because you can match it to the bank ID.

The date the check is written is provided as a tracking item.  However, checks can also be 'post-dated'.  Post-
dating a check means that the date is sometime in the future.  The receiver of the check is agreeing not to
deposit the check until that date.  You should not assume that the check will be held until that date however, so
be prepared because it is likely the check will not be held.

The check amount should be written twice, once in numbers and once in words.  This is a double check on the
amount and it is your responsibility to get the amount right both times.  If a check is processed for the wrong
amount, the bank will first check to see if you wrote the amount the same in both places.

Each check is unique because of the check number.  You should use the check number to track the check in
the check register.  Also, when you get the checking account statement from the bank, the checks are listed
using the check number for easier matching.

The checking account has a unique number at your financial institution.  Please be aware that the checking
account number, the check number on the bottom, and the routing number are all written in magnetic ink so the
check can be processed by machine.  This is why you should keep check books and credit cards away from
anything magnetic.

The bank routing number is also a unique number within the United States banking network.  The routing
number allows the financial institution to know where to send the check.  By combining the routing number and
the account number, you have a unique identifier for any account.  Like the mail which is first sorted by city,
then street, then address, the routing number is like the city and the account number is like the street address.
The bank name is listed and sometimes the location of the branch where the account was opened.

When you fill out a check, the name of the person being paid should be written on the Payee line.  This is the
person that has a right to cash the check.

Also on the check, but not highlighted, are the memo line (For:) and the signature line.  The memo line gives
you a little space to make a notation (most utilities like for you to place your utility account number in the memo
space).  The signature line is where you sign the check.

A few legal points about a check; first, a check is a legal document.  The check signifies an approved transfer
of money between you and the check receiver.  Second, when you sign the check, thereby approving it, you
are creating a legal commitment to transfer the amount of money on the check.  Third, when your check is
presented at your financial institution and there is not enough money in the account to cover the check, you
have committed a crime.  When you present a check for goods or services and cannot honor the check with
funds in your account, you have committed a fraud.  

After you have written the check this is what happens:

Step 1: you present the check to the receiver.

Step 2: to cash the check, the receiver endorses it (indicating that they are the proper party to whom the check
was written) and completes a deposit slip.  If someone endorses and deposits a check that does not belong to
them, that is a crime.

Step 3: the receiver deposits the check into their financial institution which may or may not be the same as
yours.

Step 4: the receiver's financial institution increases the receiver's account balance but does not show the
balance as cleared funds.  The receiver's financial institution takes the check and prints the amount of the
check on the bottom in magnetic ink.  The check is then run through a reader, along with all the other checks
from the day, which captures the data on the bottom of the check.

Step 5: the receiver's financial institution sorts the checks by bank routing number and sends your check to
your financial institution where it is processed and the funds subtracted from your account.  If there is not
enough money in your account, the check is returned to the  receiver's financial institution.

Step 6: once the money has been removed from your account, the receiver's financial institution gets notified
electronically of a transfer of funds for the receiver.  At this time, the receiver's financial institution shows the
account having cleared funds.

As you can see, this isn't terribly complicated and financial institutions are converting more and more to
electronic transactions instead of handling paper.  (Why ship paper when the account numbers and check
amounts can be processed electronically along with an image of the check?)  In olden times, the bank returned
the checks to the person who wrote the check, but today, checks are viewed as images on-line while, in many
cases, the original document is destroyed.  Of course, with some financial institutions you have the option of
getting the checks back, but it is cost effective for the bank to not handle the paper checks.

The same basic process is used with your debit card, only instead of paper, the entire transaction is electronic.  
The store has a card reader that is connected to a financial institution where the transactions are processed.  
You swipe your card through the slot and the card reader sends a message to its financial institution.  It sends
the information from the card and the amount of the transaction.  That financial institution sends an electronic
message to your financial institution and if the transaction is approved, presto.  If not, you are REJECTED!!  
This means that your transaction was not approved and you have to use a different payment tool (like cash,
check or a credit card).
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