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Course: Financial Literacy Library > Unit 2
Lesson 2: Understanding bank accountsEffective bank account management
Efficiently managing your bank account is crucial for financial health. By firming up a few key practices, you can ensure smooth transactions and avoid potential pitfalls. Let's look at the essentials of account management and how to apply them to real-life scenarios.
From opening account to managing it
Once you've opened a checking/debit or savings account, your bank might provide you with a booklet of checks to use for payments and transactions.
With that in mind, let's dive into managing your bank account effectively, taking advantage of modern tools while understanding some of the traditional instruments like checks.
Understanding routing and account numbers
When you want to set up your paycheck to go right into your bank or make payments without having to do it yourself each time, you'll need to know two things: your bank's routing number and your account number. These numbers make sure your money goes to the right place.
- Routing number: This 9-digit code identifies your bank branch. You can find this number on the bottom left corner of your checks, by logging into your online banking account, or by searching the internet for it.
- Account number: This is the unique number for your personal bank account. It tells your bank which account to deposit money into or withdraw money from. This number is located next to the routing number at the bottom of your checks and is also available through your online banking portal.
Routing and account numbers are used for many financial transactions. For example, your employer will need both of these to set up a direct deposit of your paycheck. You will also need these set up online payments for your bills, like utilities, or credit card payments.
Automatic payments and transfers
Setting up automatic payments is like putting your bill payments on autopilot. Imagine Saraya, who hates having to remember to pay her monthly gym membership. She sets up an automatic transfer from her checking account using her routing and account numbers, and her payment is never late.
Regular money transfers can also be automated. Say, Brett wants to save
Avoiding overdrafts
An overdraft occurs when you spend more money than you have in your account. This can result in costly fees. Overdrafts can happen to anyone. For example, Kori checks out at the supermarket, forgetting that an automatic bill payment has just been made that day. His account balance isn't enough to cover his groceries, leading to an overdraft fee.
Or take Dina, who wisely linked her savings to her checking account. When she accidentally goes over her account balance after making a larger-than-usual credit card payment, her bank automatically pulls the needed funds from her savings to cover the shortfall, avoiding an overdraft fee.
To avoid overdrafts:
- Monitor your balance: Always know how much money you have by checking your account often.
- Set up alerts: Set up your account to send you a message if your money is getting low.
- Link to savings: You can connect your checking/debit account to your savings account, so if you ever spend too much, the extra money comes out of your savings instead of costing you an overdraft fee.
In closing
Knowing your routing and account numbers, setting up bills to pay automatically, and making sure you don't spend more than what's in your account will put you on the path to being great at managing your bank account. Just keep an eye on your money regularly and set up a few things in advance to make sure everything stays in order.