When thinking about how money can be transferred from one party to another, it's easy to get confused. After all, long gone are the days when money was transferred simply by one person handing cash to another, or when it was moved over long distances in pockets or stagecoaches. Today's money moves electronically much of the time, and so it's worth understanding the difference between transfer methods such as direct deposit and wire transfers.
Let's review direct deposit first. It's the transfer method you're more likely to be familiar with since many employers these days prefer to pay workers via direct deposit. The IRS sends out a lot of tax refunds by direct deposit, too, and the Social Security Administration uses it to transfer monthly benefit payments to retirees and other recipients. Many other government agencies and organizations, including the military, also use direct deposit.
Direct deposit is a form of electronic money transfer that's forest-friendly, requiring no paper checks. It's also quite convenient, sparing you a trip to the bank to deposit a check and making it impossible for the check to get lost in the mail, misplaced somewhere in your home, or stolen. (It's especially handy if you're on an extended vacation or perhaps even laid up in a hospital for a while – there will be no paycheck sitting in a pile of mail somewhere for several weeks.)
Direct deposit is flexible, too, permitting you to have deposits automatically divided between, say, a checking account and a saving account. (It's worth noting that you do need to have a bank account into which direct deposits can be made.) Another advantage of direct deposit is that it's typically quite fast, with funds often arriving in your account sooner than they would have via a paper check deposit. Direct deposit is the fastest way to receive a tax refund, too. Whereas paper checks can take many days to clear, funds direct deposited into a bank or credit union must clear and be available on the next business day after they were received. Many institutions make funds available on the same day.
Many banks will offer customers who receive regular direct deposits higher levels of services or eligibility for certain kinds of accounts. Best of all, direct deposit is typically free!
Wire transfers, on the other hand, are generally not free. Still, in certain circumstances, they can be just what the banker ordered. Like direct deposit, it's another kind of electronic money transfer, but whereas direct deposit is most often used for recurring payments, wire transfers are often only used occasionally.
One upside of wire transfers is their speed. Direct deposit is quite speedy, but it can sometimes take a day or a few days to get access to your money. With wire transfers, the transferred money is usually available within a matter of hours.
Wire transfers are typically conducted between banks and/or credit unions, not between employers or companies or agencies and a bank. They're used when one person wants to send money to another person, or to facilitate a transfer between an organization or company and a person. (Western Union, for example, has a long history of wiring money for people.) A common use is at real estate closings, when the buyer's money is wired to the bank account of the seller.
Fees charged to wire money vary by institution, and both the sender and recipient are typically charged. Common fees are about $25 to send a wire transfer and about $15 to receive one. Some institutions charge recipients little or no fee.
Wire transfers and direct deposits are commonly used ways to transfer money electronically, but they're not your only option. These days there are more electronic payment methods available than ever. You can send money to someone electronically via PayPal, for example, as well as via apps such as Square Cash, Google Wallet, and Venmo (Venmo was bought by PayPal in 2013). Each has pros and cons and, often, fees .
When you need to transfer money, be familiar with all your options so that you choose the one that best suits your needs and don't spend any more than you have to.
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