how demand deposits work
if depositors were required to notify their banks in advance before withdrawing funds it would be quite a challenge to obtain cash or make mundane transactions demand deposit accounts are intended to provide ready money the funds that people need to make a purchase or pay bills the account s holdings can be accessed at any time without prior notice to the institution the account holder simply walks up to the teller or the atm or increasingly goes online and withdraws the sum they need as long as the account has that amount the institution has to give it to them the money is available on demand hence the name demand deposit for this sort of account demand deposit accounts which typically are offered by banks and credit unions are in contrast to investment accounts offered by brokerages and financial services firms while the funds may be invested in highly liquid assets the account holder still must notify the institution that they wish to withdraw money depending on the asset in question it may take a day or two for the investments to be sold and the cash to be available dda can also mean direct debit authorization which is a withdrawal from an account for purchasing a good or service it s what happens when you use a debit card but it s fundamentally the same concept the money is immediately available drawn on the linked account for your use special considerationsdemand deposit accounts ddas may have joint owners both owners must sign when opening the account but only one owner must sign when closing the account either owner may deposit or withdraw funds and sign checks without permission from the other owner some banks create minimum balances for demand deposit accounts accounts falling below the minimum value typically are assessed a fee each time the balance drops below the required value however many banks now offer no monthly fees and no minimum balances types of demand deposit accounts ddas ddas are primarily checking accounts but they can include savings accounts as well money market accounts mmas are a bit of a gray area some financial authorities classify them as ddas some don t demand deposits make up most of a particular measure of the money supply m1 this is the sum of all of a nation s demand deposits plus all the currency in circulation it s a measure of the most liquid types of money in the money supply 1as of may 2022 the total amount of demand deposit accounts in the u s officially the total demand deposits component of m1 was 4 98 trillion this compares to 1 4 trillion five years ago and 733 billion 10 years ago 2requirements for demand depositsthe key requirements of ddas are no limitations on withdrawals or transfers no set maturity or lockup period funds accessible on demand and no eligibility requirements the payment of interest and the amount of interest on the dda are up to the individual institution once upon a time banks could not pay interest on certain demand deposit accounts for example the federal reserve board s regulation q req q enacted in 1933 specifically prohibited banks from paying interest on checking account deposits many banks got around that rule via negotiable order of withdrawal now accounts checking accounts with a temporary holding period on funds which allowed them to actually pay some interest reg q was repealed in 2011 3still ddas tend to pay relatively low interest rates on savings accounts no interest at all as is often the case with checking accounts reg q s repeal notwithstanding they may also charge various fees for handling the account demand deposit vs term deposita demand deposit account and a term deposit account are both types of financial accounts offered by banks and credit unions but they differ in terms of accessibility or liquidity and in the amount of interest that can be earned on the deposited funds basically a dda allows funds to be accessed anytime while a term deposit account also known as a time deposit account restricts access to funds for a predetermined period funds cannot be withdrawn from a term deposit account until the end of that term without incurring a financial penalty and withdrawals often require written notice in advance the most familiar type of term deposit account is the certificate of deposit cd you buy the cd for a set term or time period a certain number of months or years and you generally don t touch it until the term is up it sits in a special account earning interest at a fixed rate that interest is the second big thing distinguishing demand deposits from term deposits term deposits offer interest rates that are generally higher ddas much closer to prevailing market rates that s basically the trade off in return for the ability to access your funds on demand your money earns less in a dda the time deposit pays more in compensation for its lack of liquidity 