What Is a Demand Deposit Account? And Why You Need One

Chances are that you have at least one bank account. According to the Federal Deposit Insurance Corporation (FDIC), nearly 96% of American households have at least one checking or savings account. But how much do you really know about your account?

Understanding the different bank account types and how they work can help you manage your money more effectively. There are two account structures: demand deposit accounts and time (term) deposit accounts. Demand deposit accounts are likely the ones you use more often since they include your checking and savings accounts and work for various everyday transactions.

Below, we’ll discuss how a demand deposit account works and how to get the most out of one.

Key takeaways

• A demand deposit account is a type of bank account that allows you to access your money at will.
• Popular examples include checking, money market, and savings accounts.
• Other accounts are time deposit accounts that often provide higher interest rates in exchange for leaving your money untouched for a specific period.
• Demand deposit accounts can have costs, including monthly maintenance charges and ATM withdrawal fees.

What is a demand deposit account?

I'm sure you've been there (I certainly have!). As you're getting ready for bed, it occurs to you that you forgot to pay a bill, so you scramble to your computer or cell phone to pay it right away. If you have a demand deposit account, paying your bill at any time — even at midnight or early morning — is possible.

A demand deposit account typically gives you the ability to deposit or withdraw cash at any time without the bank requiring advance notice. It’s a flexible option that you might use for everyday transactions or your emergency fund. You’ll usually also enjoy several options for adding or removing funds, such as visiting an ATM, doing transactions online, or going to a local branch.

This account is useful for storing cash you need to access on a regular or ongoing basis. For example, it’s a useful option for money you'll use to pay your rent, cover your credit card bill, or pay off that utility bill you forgot about. You can also use it to receive your pay via direct deposit, move funds between accounts, or send money to loved ones.

While demand deposit accounts are highly liquid, your particular bank or credit union can have rules that impact accessing your funds. For example, you might encounter daily or per-cycle transaction limits. Additionally, some demand deposit accounts pay interest, which gives you an incentive to leave your money in the account.

Common types of demand deposit accounts

Demand deposit accounts are common, so you likely already have one or more of them without realizing it. Some of the most common types include checking, savings, and money market accounts. Let’s look at what they offer for different financial needs.

Checking accounts

A checking account is the type of account I use nearly every day. It's a demand deposit account that I use to receive my paycheck, pay my bills, and withdraw cash at an ATM.

These accounts usually allow unlimited withdrawals per month and provide a debit card for ATMs and purchases. Most checking accounts also give you check-writing privileges, so you can write paper checks to pay your rent or other expenses. Online bill pay and money transfer services like Zelle are popular features as well.

You can have a checking account at a bank or a credit union. While fees vary by institution and account type, some examples include monthly maintenance fees and ATM fees. However, the best checking accounts either have no monthly fees or waive them if you meet certain balance or deposit requirements. Some, like the SoFi Checking account, even pay interest.

Featured checking account

Money market accounts

Money market accounts combine the perks of an interest-bearing account with check-writing privileges, a debit card, or both. They can be an appealing option for storing your savings while still maintaining flexibility for purchases.

In general, these accounts have higher annual percentage yields (APYs) than basic savings or checking accounts. However, money market accounts usually have higher minimum deposit or balance requirements and monthly fees too.

Another key consideration to keep in mind is accessibility. While money market accounts are demand deposit accounts, they do have limitations. They usually limit you to six withdrawals per month, and if you exceed that number, you may have to pay an excess transfer fee.

Savings accounts

Savings accounts are those you can use to store cash for your goals or your emergency fund. I have several, including a designated account for emergencies, another account for travel, and a third one for occasional splurges.

Savings accounts pay interest, so your account balance can grow over time. The best savings accounts pay significantly higher-than-usual rates, and I’ve found some that offer up to 10 times the national average APY.

Some savings accounts have monthly account fees and other potential charges. Also, some banks and credit unions limit the number of withdrawals you can make per month. Additionally, it’s less common to get a debit or ATM card with these demand deposit accounts.

Featured savings account

Comparison to time deposit accounts

Time deposit accounts are the other major banking category. Unlike demand deposit accounts, which give you regular access to your money, time deposit accounts are more limited. Your money is usually locked into the account for a specific period, such as several months or even years, and you might not be able to withdraw money before that date without incurring penalties.

One of the most common types is the certificate of deposit (CD). With these accounts, you typically deposit a lump sum and commit to leaving it there for a certain term, such as 60 months. During that time, the money in the account earns interest. However, if you withdraw money before the CD’s term ends, you’ll often have to pay penalties in the form of forfeited interest.

The tradeoff is that time deposit accounts tend to pay much higher APYs than demand deposit accounts, so they’re a good option for the cash you don’t need for emergencies or short-term goals. Additionally, you can find special versions with more flexibility for contributing to the account or removing funds without fees.

Why you might want a demand deposit account

A demand deposit account can be helpful in the following scenarios.

• You want a safe place to store your money: Rather than storing your money at home, a demand deposit account is a safer option. You get the security and safety of a bank account and can still access your money at will.
• You want protection for your funds: As long as you open your demand deposit account at a federally insured bank or credit union, your balance will be protected by up to $250,000 (per depositor, per account ownership category) of FDIC or National Credit Union Administration (NCUA) coverage. This is much safer than putting money in riskier investment accounts.
• You want flexibility: With some accounts, such as CDs, accessing money when you’re in a bind can be a challenge. But with a demand deposit account, you can withdraw or transfer cash whenever you need it, usually without providing advance notice or paying a penalty.
• You’re saving for short-term goals: If you’re building an emergency fund or saving for a down payment on a house, you may need to access your funds within a relatively short time frame. If that’s the case, locking your money in a time deposit account doesn’t make sense. Instead, opening a demand deposit account with a high APY — such as a high-yield savings account — will allow you to earn interest while ensuring quick access.

Why you might consider other account types

Although a demand deposit account can be useful for your day-to-day financial needs, it's not appropriate for all situations. In the following circumstances, other accounts can make more sense.

• Your focus is on growth: If you’re focused on growing your cash as much as possible, such as saving for your retirement, a demand deposit account may not produce significant enough returns via interest. Investing your money in the stock market or depositing it into a high-yield CD could be a better option for growing your money, though do consider the limitations, fees, and risks.
• You don’t need the cash right now: Demand deposit accounts are best for cash you need to access relatively soon. For example, the money you need to pay your bills or the cash you’re saving for a new car purchase could go into a demand deposit account. For other goals or excess cash, a time deposit account with a higher APY may be a better fit.

How to get the most out of a demand deposit account

To maximize the benefits of your demand deposit account, follow these tips.

• Compare fees: Some demand deposit accounts involve fees, including monthly maintenance charges, ATM fees, and overdraft charges. However, you can reduce or even eliminate these fees by shopping around for a free checking or savings account or by meeting certain deposit or balance requirements. For example, when I was shopping around, I found that my local credit union had the best option for me; they had a free checking account without any balance requirements and no ATM fees.
• Consider account restrictions: Some demand deposit accounts have limits on how many withdrawals you can make per month. For example, some banks limit savings accounts to six withdrawals per month, and they may close the account, charge an excess transaction fee, or switch you to a checking account for exceeding that.
• Check the deposit requirements: Deposit requirements vary by bank. While some require nothing, others require you to have hundreds to open an account, which can be frustrating when you're on a tight budget and have limited cash available. Many regional or community banks and credit unions have lower deposit requirements, making them more accessible.
• Review other perks: With some demand deposit accounts, you can take advantage of other benefits, such as an interest-bearing checking account, free checks, or debit card rewards.

FAQs

Bottom line

Demand deposit accounts are good places to put money you need to pay your recurring bills and major expenses and to save for short-term goals. Now that you understand how these essential financial management tools work and how they compare to other account options, you can allocate your money to the appropriate account type. When you're ready to open your demand deposit account, take a look at the best banks to find the right choice for your needs.