What Is a Demand Deposit?

Demand Deposits Explained

Woman at ATM holds her bank card and coffee cup
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Often offered by checking or savings accounts, a demand deposit is a type of deposit that lets you withdraw your money—at any time, for any reason—without having to notify your bank. These deposits can be accessed at any time, hence their “on-demand” branding. 

Let’s learn more about what demand deposits are, how they work, and how they can benefit you.

Definition and Examples of Demand Deposits

A demand deposit account (DDA) is a bank account in which you can withdraw your money at any moment, for any reason, without having to give the bank prior notice. 

Demand deposit accounts eliminate your need to carry cash because your money is always at your disposal via a debit card, checkbook, or transfer. But this constant access to funds comes at a cost. Demand deposit accounts generally earn little to no interest compared to time deposit accounts

One common type of demand deposit account is a checking account that allows you to withdraw funds whenever you’d like simply by making a purchase. You can also transfer funds online, visit a bank teller, or take out cash at an ATM. Savings accounts and money market accounts are also types of demand deposit accounts.

In exchange for total accessibility, your demand deposit account may earn very little interest, if any at all. However, your funds are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, which can provide some peace of mind.

  • Acronym: DDA

How a Demand Deposit Works

Demand deposit accounts work like this:

  1. You open a demand deposit account at your bank.
  2. You deposit money into that account
  3. The bank holds onto your money for safekeeping.
  4. You can access your money whenever you need it, without receiving approval from the bank.

Your bank may also charge monthly fees to maintain your account. But you can usually avoid these fees by maintaining a minimum balance or setting up direct deposits (if it’s a checking account). Each bank has its own fee policy.

Types of Demand Deposits

There are three main types of demand deposit accounts: checking accounts, savings accounts, and money market accounts.

Checking Account

A checking account is one of the most common types of demand deposit accounts. It comes with a debit card and checkbook so you can use your money at any time to pay bills, buy items in-store, make purchases online, pay friends, withdraw cash, and more.

Checking accounts are the most accessible type of bank account, but they also pay the least amount of interest. Most checking accounts don’t earn interest at all. Of those that do, the current national average is around 0.03% APY.

There are many different types of checking accounts, including online, interest-bearing, reward, student, and senior checking accounts.

Savings Account

Savings accounts are another popular type of demand deposit account. You typically earn more interest in a savings account than you would with a checking account, but there are a few more restrictions to keep in mind. 

For example, you can’t make more than six transfers or withdrawals a month due to Regulation D. This includes pre-authorized, automatic transfers (like transfers for direct bill payments or overdraft protection) as well as any transfers and withdrawals initiated by telephone, fax, or computer. It also includes transfers when making purchases and those by check or debit card. Withdrawals made in person at a bank branch, by mail, or at an ATM do not count toward the six-per-month limit.

If you go over this limit, your bank may charge a fee or convert your savings account into a checking account. Most banks don’t provide ATM cards for savings accounts, which means you’ll have to transfer money to another account if you want to withdraw cash via an ATM. 

Although rarely if ever exercised in practice, banks must still reserve the right to require seven days’ advance written notice for an intended withdrawal.

Money Market Account 

Think of a money market account as a checking and savings hybrid account. You get the benefit of having a debit card and checks at your disposal, and you earn higher interest than you would with a typical checking account. 

The biggest downside of money market accounts is that, like savings accounts, you cannot make more than six withdrawals a month (excluding those made in person, at an ATM, or by mail). A bank may also require you to maintain a higher balance to get started with a money market account.

Demand Deposit vs. Time Deposit

In addition to demand deposit accounts, your bank may also offer time deposit accounts, such as certificates of deposit (CDs). Here’s how the two compare: 

Demand Deposit Time Deposit
Can access funds on-demand without needing to give the bank prior notice Money is locked up for a specified period of time unless you pay a fee
May have monthly maintenance fees Usually fee-free unless you withdraw funds before maturity
Earns little to no interest Generally earns more interest than checking or savings accounts

Demand Deposit vs. NOW Account

Another type of account your bank may offer is a negotiable order of withdrawal account—also called a NOW account. NOW accounts were created after the Great Depression as a loophole for banks to pay interest on checking accounts. 

Rules have changed since then and now it’s legal for demand deposit accounts like checking accounts to earn interest. This makes the main difference between NOW accounts and demand deposit checking accounts the amount of time you must notify the financial institution before a withdrawal. With NOW accounts, a bank may require seven days’ notice. These days, NOW accounts are very rare, likely because they offer no obvious benefits over a demand deposit checking account.

Demand Deposit Fees 

Remember, demand accounts are all about accessibility. You get immediate access to your cash right when you need it. But receiving this convenience means that, in addition to accepting lower interest rates, you may also pay fees. Among other situations, direct demand accounts may charge fees if you:

  • Let your account dip below a certain balance
  • Don’t have direct deposits set up
  • Overdraft your account
  • Use ATMs outside of your network

Thanks to the rise of online banks, many institutions offer free checking and savings accounts. They still pay little interest relative to CDs, but they’re a good way to minimize potential costs associated with demand accounts.

Advantages and Disadvantages of Demand Deposits

Pros
    • Easily accessible
    • Low risk
Cons
    • Lower interest rates than CDs
    • Potential fees

Pros Explained

  • Easily accessible: You can withdraw your money at any time by using your debit card, writing a check, visiting a bank teller, making a transfer online, or withdrawing cash at an ATM.
  • Low risk: The money in your demand deposit account is FDIC insured up to the $250,000 legal limit. 

Cons Explained

  • Lower interest rates than CDs: Demand deposits earn lower interest rates than time deposit accounts.
  • Potential fees: Some banks charge monthly fees if your demand account dips below a certain balance or for other reasons.

What Is a Demand Deposit in Economics?

The federal government uses demand deposits to measure how much liquid cash is available in the U.S. money supply chain. This measure of money is referred to as “M1” and is the sum of all demand deposits, currency, and other liquid deposits held at financial institutions.

As of July 5, 2021, the U.S. has an M1 of roughly $19.4 trillion, consisting of $4.4 trillion in demand deposits, $2.1 trillion in currency, and $13.0 trillion in other liquid deposits.

Key Takeaways

  • A demand deposit is a bank account that allows you to withdraw funds at any time without having to notify the bank first.
  • The most common types of demand deposits are checking, savings, and money market accounts.
  • A demand deposit is the most accessible type of bank account, but it pays the least amount of interest and may come with fees.