What is a Demand Deposit?
A demand deposit is a type of bank account from which the account holder may withdraw money at almost any time.
🤔 Understanding demand deposit
A demand deposit account is a type of bank account that allows for on-demand withdrawals, meaning the account holder can add or remove funds from the account at any time. Checking accounts are one of the most common types of demand deposit accounts, letting customers access their money by visiting a bank, making online transfers, writing a check or using a debit card. Demand deposit accounts are different from time deposit accounts, like Certificates of Deposit, which lock the funds in the account away for a period of time. Accounts that limit withdrawals, like certificates of deposit (CDs) or some savings accounts, are not demand deposit accounts.
The checking account is one of the best-known types of demand deposit accounts. The accounts are expressly designed for frequent transactions, so there are no limits on when customers can add or remove money from the accounts. Banks also tend to make it easy to withdraw or use the money in the account by offering online bill payment services and debit cards that the customer can use to make purchases.
Demand deposits are like video streaming…
When you want to watch a video on a streaming service, all you have to do is open the app and choose the video you want to stream. It’s faster than going to a movie or watching a show on TV where you have to wait until a scheduled time. Demand deposits are similar. You can withdraw the money any time rather than waiting to make withdrawals on a set schedule.
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- What is a demand deposit?
- What are the types of demand deposit accounts?
- How do demand deposits work?
- Are demand deposits assets?
- What is the demand deposit formula?
- What is a DDA number?
- What is the difference between a demand deposit and a savings deposit?
- What is the difference between a demand deposit and a term deposit?
- What are the advantages and disadvantages of demand deposit accounts?
What is a demand deposit?
A demand deposit is a type of bank account that lets customers easily access their money. They can make withdrawals on demand. Certain demand deposit accounts can require up to six-days notice before a withdrawal, but otherwise do not limit withdrawals, such as having a maximum number of withdrawals per statement period.
Demand deposit accounts serve as a place for people to keep their money safe, but easy to access. One of the most popular types of demand deposits is a checking account. A bank holds the customer’s money in the checking account, but gives the customer ways to easily use or withdraw the funds.
Demand deposits exhibit the following requirements:
- No maturity period
- Payable on demand or with fewer than seven days’ notice
- May or may not pay interest
- Unlimited withdrawals and transfers
- Few eligibility requirements (such as minimum opening balance requirements)
Banks tend to make checking accounts easy to access. For example, someone can visit a branch in-person to make a withdrawal. They can also use the internet to make a transfer between their accounts or to pay bills from the checking account. Most banks also offer debit cards that customers can use to make purchases or withdraw cash at ATMs. Finally, checking accounts typically come with checkbooks. Customers can write checks to draw funds from the account.
Demand deposits are an important part of the economy’s money supply. People regularly spend money, even if they don’t have the physical currency to spend, using things like debit cards and checks to draw from their demand deposit accounts.
Together with coins and cash, demand deposits make up the M1 money supply, which includes the most liquid forms of money.
What are the types of demand deposit accounts?
There are two primary types of demand deposit accounts: checking accounts and NOW accounts.
A checking account is a type of bank account designed for frequent transactions. It’s one of the most popular types of demand deposit accounts.
Consumers can spend the money they have in their checking accounts without restriction and banks tend to make it easy to access and use the money in the accounts. Checking accounts typically come with debit cards that people can use to withdraw cash at ATMs or make purchases online or in person. People can also write checks against the balance of their account or make online bill payments and transfers.
Checking accounts typically do not pay interest on the balance in the account.
A Negotiable Order of Withdrawal (NOW) account is a type of demand deposit account that has more restrictions than checking accounts.
Where checking accounts allow immediate, unrestricted withdrawal of funds, NOW accounts can place certain restrictions on withdrawals. For example, banks or credit unions can require seven days of written notice before you make a withdrawal. In practice, this is rare unless you try to withdraw large amounts from your account.
Another major difference between NOW accounts and checking accounts is that NOW accounts typically pay interest on your account’s balance.
Other types of accounts
There are other types of accounts, such as bank money market accounts, that allow some flexibility when it comes to accessing the funds in the account. For example, accounts often come with checkbooks that customers can use to access the money in the account.
However, these accounts come with restrictions, such as the limit of six withdrawals (excluding in-person and ATM) on money market accounts. These restrictions mean that accounts like money market accounts don’t qualify as demand deposits despite sharing many similarities.
How do demand deposits work?
Demand deposits work by giving you unrestricted access to the money you have in the account. You can easily withdraw or otherwise use the funds.
For example, checking accounts give customers debit cards, checks, and the option to pay bills or transfer money over the internet. This means that the customer doesn’t have to carry large sums of money to make transactions. Instead, they can spend the money in their account on demand.
By allowing on demand access to the money in the accounts, demand deposits allow for a larger money supply than just the supply of coins and bills in an economy, making it easier for people to do business.
Are demand deposits assets?
What is the demand deposit formula?
When you deposit money at a bank, the bank doesn’t lock the money in a vault and hold it until you ask for it back. It retains a portion of the money, but uses the remainder for other purposes, such as lending.
According to law, banks must retain a certain amount of the money customers have deposited so the bank can return those funds to customers who ask for their money. The Federal Reserve can set and change this number. Lower reserve requirements mean that banks can lend more money, which may stimulate the economy. Higher reserve rates mean that banks must retain more customer deposits.
On March 26, 2020 the Federal Reserve reduced the reserve requirement to 0%, where it remains as of February 2021.
The demand deposit formula is the formula banks use to determine the size of the reserves they must keep. The formula is:
Balance of demand deposits x Reserve requirement = Required reserve balance
Currently, the required reserve balance for all banks is $0 because the reserve requirement is 0%. If the reserve requirement were 10% and a bank had $100M in demand deposits, it would have to hold $10M in reserve.
$100,000,000 x .10 = $10,000,000
What is a DDA number?
All bank accounts, including direct deposit accounts, have an account number that identifies the specific account. You have to use the account number when transacting with the account.
For example, when setting up direct deposit with your employer, you need to provide your bank’s routing number so your employer knows which bank to send your paycheck to. You also must provide your account number so your employer can deposit the funds to the correct account at the bank.
What is the difference between a demand deposit and a savings deposit?
A savings deposit is an account, such as a savings account, that is not designed for frequent transactions. Typically, savings deposits pay interest while most demand deposit accounts do not.
Savings deposits can also place additional restrictions on withdrawals, such as limiting the number of withdrawals that can be made in a statement period. Recently, the Federal Reserve has lifted this requirement to ease financial problems caused by COVID 19, though some banks still place restrictions on savings withdrawals and transfers.
What is the difference between a demand deposit and a term deposit?
A term deposit forces you to set aside the money you deposit for a set period. One common example is a Certificate of Deposit (CD).
When someone opens a CD, they choose a term, such as six months, a year, or two years. After opening the CD, the depositor cannot withdraw funds from the CD until its term ends. If they try to make an early withdrawal, they must pay a penalty.
Term deposits typically pay interest and usually pay higher interest rates than other savings deposits because of the time restrictions involved.
Demand deposits have no restrictions on withdrawals, which means they are better-suite for people who need easy access to their funds.
What are the advantages and disadvantages of demand deposit accounts?
Demand deposit accounts, such as checking accounts, have both pros and cons.
One of the greatest advantages of demand deposit accounts is that they make it easy to use your money. You can use debit cards and electronic payments to make purchases or pay bills rather than having to carry around large sums of cash.
Demand deposit accounts are also safe. The Federal Deposit Insurance Corporation offers up to $250,000 per depositor, per bank, in insurance to protect the accounts. If your bank closes, the FDIC will reimburse you for losses up to the limit.
One drawback of demand deposit accounts is that many charge fees if you don’t meet certain requirements, like maintaining a minimum balance.
Many also don’t pay interest, while many savings deposits and term deposits do. If you keep too much money in a demand deposit account instead of a higher-interest account, you’ll pay the opportunity cost of lost interest.
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