Inside the Checking Account
Having a bank account is both a tremendous responsibility and a huge convenience. Without the need to carry around large sums of cash, your money is protected from theft while you are out and about on your daily duties. However, when you entrust the money to someone else, such as your bank, there are certain factors to be aware of before you start spending 'your money'.
When is My Money My Money?
When you visit your bank to make a deposit, there is a record made of the transactions you perform. When you make a deposit, there is a record made. When there is a withdrawal, there is a record made. These records create the history of your bank account, and will be used to track the balance of your account at any specific moment. However, these records (while accurate as to timing and amounts) do not necessarily tell the whole story.
Now, every bank is going to have its own guidelines and specific policies, so the examples given here will be generic and may not apply to your own personal bank account. Due to disclosure laws, the bank does have to provide you with an idea of your bank's 'Funds Availability' policy, and if you do not know this I would recommend you ask them for details on this.
Some generalities are usually commonplace, however. First, cash is still king. If you deposit cash into your account, that money is available immediately. I often tell customers to go stand at the ATM, and I will tell them the second the money is available to them (of course, they never do this, as if they needed cash they wouldn't be handing it to me, they would keep it). However, I use this as an example of how quickly cash is made available.
Electronic deposits are also generally made available immediately. So, your direct deposit is often available immediately, as are Automated Clearing House (ACH) transactions (which is the generic term for direct deposit, as it does not need to be from an employer or for payroll) and Wire Transfers (which are electronic deposits on steroids as the funds transfer in minutes instead of days like an ACH). An ACH might take 3 business days to be put into your account, but this is generally not a delay of making funds available, it is a process time delay.
Exceptions Around 2 or 3 O'clock
Some banks have an end of day cutoff at 2 or 3 pm on week days. Transactions done after this time are often considered to have been made the following day. This can sometimes affect the funds availability policy, and you should be aware of whether your bank has such a policy. Sometimes, this policy can vary from branch to branch as well, so be aware of this also.
Depositing checks is where most people get into trouble. A check is not an instant transaction (it never has been), and it will generally take some time for these funds to be made available. This policy is set by the bank, within the regulations set forth by the Federal Reserve. Funds availability is covered under Regulation CC, which can be found on the Federal Reserve website.
A deposited check is not available immediately, though it will show up on your account as deposited. It is, generally speaking, available the following business day. This means weekends would be available Tuesday. Holidays can sometimes affect when funds are available. Deposits not made in person (such as into an ATM) might be on hold for a longer period of time. The 2/3 cutoff time mentioned above might also affect the availability of the check's funds.
So, What Happens?
If the funds you deposited into your account are not yet available to be spent, and you spend them, then you can overdraw your account.
An Example: I have $100 in cash in my account at 10 AM today (we'll say today is Wednesday). I come to the bank at 11 AM and deposit a check for $100. This check should be available the next business day, which would be Thursday. If a transaction of mine posts to the account today for $150, such as a check I wrote yesterday or even today, I have spent money that was not available to me, so I have overdrawn my account.
Now, on my statement, it will say I had $200 in my account when the $150 payment posted to the account. However, if my check was $100, and my check was not available, then I shouldn't have spent that money yet, and I am at fault. This is all disclosed in the paperwork you probably never read when you opened your account.
Exceptions to the Rule
Sometimes, you can have your money available to you sooner. If your check happens to be drawn on the bank you choose to do business with, then you can simply cash your check and deposit the money as cash. This means the money will generally be available immediately, and there is less opportunity to overdraw your account due to the availability of funds.
However, sometimes you provide the bank with a check that can take longer to process, which delays the availability of funds beyond the standard next business day. Common examples are checks over $5000, checks deposited into severely overdrawn accounts, checks deposited into frequently overdrawn accounts, new customers, and 'other emergencies' (think about collecting money from banks that were located in New Orleans just after Hurrican Katrina or banks that are located in Joplin, MO after the tornado destroyed it).
Sometimes, a bank will contact the bank the check is drawn on to verify the funds. If the paying bank can't, or won't, verify the funds this could also lead to an extended wait for the funds to be available. Often up to 5 business days. These exceptions are listed in Regulation CC as well.
When in doubt, you should ask your teller when the funds will be available to spend. Understand that this is different from when the check 'clears' the other bank. Funds could be made available to you and the check could still bounce when the other bank informs your bank that the other person's account does not have enough (everyone) 'available funds' in it.
Your bank also has this information in writing, so you can ask for a copy of it for your own reference.
In the end, the money is yours to spend when the bank makes it available to spend. There are guidelines in Regulation CC that say when those funds will be made available, but the bank has some leeway within those guidelines, so be aware of how the bank uses that leeway. This should avoid insufficient funds fees, and keep you and your banker both happy.