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What is a Deposit?

definition

A deposit is a transfer of money to a bank or vendor for safekeeping, to earn interest, or as a way to show you can pay for something you want to buy.

🤔 Understanding a deposit

A deposit is not a payment. It is simply money transferred to a bank, a financial institution or another party for your later use or withdrawal (meaning you get the money back). You may make a deposit for safekeeping, convenience, or to earn some money in the form of interest. Checking accounts, savings accounts, and certificates of deposit (CDs) are all types of deposit accounts. Banks pay interest on some of these accounts, because they use your deposits to make loans to others. A deposit can also refer to a portion of money used to prove you can pay for certain goods or services. This type of deposit is sometimes called a security deposit or a minimum deposit to open a financial account.

example

When your paycheck goes into your bank account every two weeks, that’s a deposit. When you hand a new landlord $500 to cover potential damages, that’s also a deposit. Adding money to your brokerage account so you can buy stocks is a deposit as well.

Takeaway

When you put money in a piggy bank, you’re making a deposit.

A piggy bank is just one place where you can deposit your money so you can use it later. But putting money into a bank account is safer than putting money in a piggy bank since you can deposit larger amounts of money and checks, and get easy access to your funds through an ATM or by using a debit card or a paper check. Plus, money in a bank is insured by the Federal Deposit Insurance Corporation (FDIC), and you may even earn interest. Depositing money in a brokerage account allows you to buy investments such as stocks, bonds and mutual funds.

If you hand over a full piggy bank to someone to prove you have savings, you’re also making a deposit.

A full piggy bank is valuable, not just because it holds money but because it shows you are serious about saving. Someone deciding to do business with you wants to know if you have good intentions, and the piggy bank full of money proves it. With a security deposit or minimum deposit, you are not necessarily giving the money away. You are showing the other party you can handle a big transaction. In some cases, security deposits and minimum deposits can earn interest, as well.

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What is a deposit?
How do you make a deposit?
What happens when you deposit money in the bank?
What is a minimum deposit?
What are the different types of deposit accounts?

What is a deposit?

Deposit is a term that has different meanings in finance, but they are all about putting money in the care of something or someone else. A deposit is money placed in a bank or other financial account. When you deposit cash or a check into your account, you are transferring funds to your bank for safekeeping and easy access, and maybe to earn a little interest on your money. You are also making a deposit when you add money to your brokerage account. Deposited money still belongs to you, and you can withdraw it according to the terms of your account. Most bank deposit accounts, including checking accounts, savings accounts, and CDs, are insured up to $250,000 by the FDIC. This means if something happens to the bank, the government will cover any loss under that amount. In other words, your money is generally safe. Brokerage accounts, on the other hand, are not insured and generally involve more risk.

A deposit can also be a portion of money you offer as a form of security or collateral when you want to buy certain goods or services. For example, if you open a margin account with a brokerage firm, which allows you to borrow money to invest, you will probably need to make an initial margin deposit equal to the amount you want to borrow. When you rent a property, such as an apartment, you will typically have to pay a security deposit to cover any potential damages. Many states require landlords to hold security deposits in safe, interest-earning escrow accounts. If there is no damage to the property during your stay, the security deposit should be refunded to you when you leave. When you make an offer on a large purchase, like a house, a deposit is often required to show the offer is in good faith.

How do you make a deposit?

You can use cash to pay for stuff. But if you want to make online purchases or larger purchases, it helps to have a bank account. To get your cash or check into an account, you need to make a deposit.

There are many ways to deposit into your bank account. If you want to deposit cash, you can do it in person by visiting your bank branch. You can also put cash into an ATM, although this is not recommended and should generally only be done at a branch ATM. To deposit cash, you fill out a deposit slip provided by the bank that outlines the specifics of your transaction, and give it to the teller or put the transaction slip and the money in an envelope (also provided by the bank) and insert it into the ATM. Deposited cash is usually available for immediate use or withdrawal.

Checks can also be deposited through an ATM or a bank branch, in the same way you’d deposit cash. At some banks, you can send checks by mail or deposit them using your mobile phone. For mobile deposits, you simply take a picture of your check and send it to your bank through an app. You might have to wait a few days for the check to clear, especially if it’s for a large amount or it comes from an unrecognized source. Some banks will allow you to access the funds or a portion of the funds right away.

Electronic deposits are an increasingly common way to add money to an account. An electronic funds transfer (EFT) allows you to make a deposit by transferring funds from one account to another. You can do an EFT between two accounts in the same bank or between two different financial institutions. You can even do it through a virtual payment system like PayPal or Venmo. If your employer directly deposits your paycheck to your checking or savings account, it is through an EFT. Most security deposits and minimum deposits are made by check or EFT.

What happens when you deposit money in the bank?

When you deposit money into a bank account, it doesn’t just sit in a vault. The bank uses your deposits to make loans to other people or companies.

Banks make profits by lending money and charging interest on business loans, personal loans, and mortgages.

Since you’re actually lending money to the bank when you make a deposit, the bank will typically pay you interest. But the interest you’ll receive from the bank is typically less than the rate it charges on the money it lends — that’s where the bank’s profits come in. How much interest you earn depends on how long you let your money sit in the account. Savings accounts and CDs, which are not designed for everyday use, typically pay interest; checking accounts, which see more daily action, typically don’t.

Although your money is put to work, you can still access it when you need it. When you deposit money, you usually have the right to withdraw the full amount from your account at any time. But different accounts have different rules, so be sure to check with your bank to know the terms and conditions of your account.

What is a minimum deposit?

You may have to deposit a certain amount of money when you open an account with a bank, broker, or other financial institution. This is called a minimum deposit. For certain bank accounts, you will need to maintain a minimum balance to avoid fees or to earn interest.

While brokers once asked for significant minimum deposits, such as $10,000 to open an account, these types of minimums have decreased in recent years. Some brokers now ask for just $500 to open a new account, some (like Robinhood) have no minimums at all. This makes it easier for new investors to try out trading platforms and research tools with little to no upfront cost.

If you want to borrow money from your broker to buy securities, you can open a margin account. The broker will ask you to deposit a certain amount of cash or securities, known as the initial margin deposit.

What are the different types of deposit accounts?

There are many types of deposit accounts, each one with a different purpose. Some are more designed for everyday use, others are for longer-term savings. Here are the different types of deposit accounts:

  1. Checking account: A checking account, as its name implies, allows you to write checks or use a debit card. It is used to pay daily expenses and bills. It typically usually pays very little or no interest.

  2. Savings account: A savings account is used to save money for emergencies or a specific goal. Savings accounts generally pay a small amount of interest.

  3. Call deposit account: This type of account combines the features of checking and savings accounts. You can easily access your money, write checks, and earn interest on your deposits. Interest-bearing checking accounts such as Checking Plus and Advantage Accounts are call deposit accounts.

  4. Certificate of deposit: A CD is used for longer-term savings. It pays a guaranteed fixed interest rate when owned for a specific period of time. Interest rates paid by CDs are higher than those paid by a savings account. A longer-term CD will offer better rates. The downside is you might lose a portion of your earned interest if you need to withdraw funds early.

  5. Money market account: A money market account is like a combined checking and savings account, earning slightly higher interest rates than a savings account. But these accounts may have some higher minimum deposits and restrictions on the number of transactions you can make in a month.

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