A demand deposit account (DDA) is a bank account that allows you to access your money at any time and for any reason. One of the best benefits of demand deposit accounts is the flexibility and freedom of withdrawing your money without informing your financial institution in advance.
Some examples of DDAs are checking accounts and savings accounts. These types of accounts allow you to withdraw funds from ATMs and make purchases online or in brick and mortar stores through debit cards without giving your bank prior notice.
Since your cash is always available to you through your checkbook, debit card, or withdrawals from ATMs, demand deposit accounts have nearly eliminated the need for you to carry cash. That said, the flexibility and convenience of demand deposit accounts come at a cost, as the vast majority usually earn little to no interest.
How Do Demand Deposit Accounts Work?
Demand deposit accounts, typically offered by banks and credit unions, are intended for use when you need quick access to your money. Funds in demand deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. If you currently have or have ever had a checking account, you should already have a general idea of how demand deposit accounts work.
Some financial institutions have account opening balance requirements, which means you would need to make an initial deposit to open your account. Others may have minimum balance requirements or monthly maintenance fees. Make sure you read the fine print when you open your account to avoid any penalties or unnecessary fees down the line.
Demand deposit accounts may have either single or joint ownership, as with many other types of bank accounts. Opening a joint bank account would require both account holders to sign the initial paperwork. Once the account is open, both owners may issue checks, deposit or withdraw money, and transfer funds to other accounts without needing the permission of the account co-owner.
Most banks don’t restrict the number of demand deposit accounts an individual can hold so that you may have both single ownership accounts and joint accounts simultaneously. Remember to check the FDIC insurance protection limits if you intend to have multiple accounts at the same financial institution.
Types of Demand Deposit Accounts
The three most common types of demand deposit accounts are savings accounts, checking accounts, and money market accounts. Each of these accounts has pros and cons, and the specifications vary between different banks or credit unions.
Checking accounts are the most common type of demand deposit account. The vast majority of them allow you to have checkbooks and a debit card to make spending as easy as possible.
Some banks offer different checking accounts targeted at groups of account holders like senior checking accounts or student checking accounts. Checking accounts are perfect for your everyday spending and managing your finances. That said, most of them earn little to no interest.
Savings accounts are another example of widely available DDAs. You are typically more restricted as to the number of withdrawals that can be made from this account when compared to a checking account.
However, these accounts earn more interest. Some banks or credit unions would also require advance notice for withdrawals from your savings account. The main reason behind the withdrawal or transfer limitations on savings accounts is Regulation D. Regulation D does not allow an account to be classified as a savings deposit account if it facilitates more than six transfers or withdrawals in a month.
Unfortunately, this transaction limit also includes automatic transfers like direct deposits, bill payments through online banking, credit card repayments, as well as check or debit card transactions. The transaction limit may cut your monthly money supply short. Exceeding this limit may incur penalties such as a fee or converting your savings account into a checking account without warning.
Money Market Accounts
Money Market Accounts (MMA) are sometimes referred to as Money Market Deposit Accounts (MMDA) and are not as common as regular checking or savings accounts.
MMAs are structured to be an interest-bearing hybrid between a checking and savings account. They give you the convenience of having your money available to you at all times with access to debit cards and checks while still earning some interest.
The main disadvantage to MMAs is that, like with savings accounts, you are restricted to no more than six transactions per month.
Money market account interest rates vary depending on the market interest rates. The central bank’s response to economic activity directly impacts market interest rates. Interest earned on MMAs could work out higher or lower than typical savings accounts, depending on the fluctuation of the market interest rate.
Demand Deposit Accounts vs. NOW Accounts
Negotiable Order of Withdrawal account (or NOW account) is a rare account type nowadays as it doesn’t offer any perks above those offered on-demand deposit accounts. NOW accounts were created as a way around the Federal Reserve Bank’s Regulation Q, which prohibited banks from paying interest on checking accounts after the Great Depression.
NOW accounts worked around Regulation Q by temporarily holding funds for a period of time and thus allowing banks to pay interest. Regulation Q was repealed in 2011, so it is now legal for financial institutions to pay interest on checking accounts, but NOW accounts still exist.
The distinct difference between demand deposit accounts and negotiable order of withdrawal accounts is the amount of prior notice you would need to give the bank to access your money. Financial institutions may require up to seven days’ notice before withdrawal with NOW accounts, while funds are readily accessible with DDAs.
Demand Deposit Accounts vs. Time Deposit Accounts
Demand deposit accounts differ significantly from time deposit accounts, sometimes referred to as term deposit accounts. Demand deposit accounts allow you instant access to your funds while earning little to no interest. Time deposit accounts require funds to remain in your account for a stipulated period while earning a fixed interest rate. Once your funds reach maturity, you can withdraw or transfer your money along with the accrued interest as you please.
A common example of a time deposit account is a certificate of deposit (CD). Certificates of deposit come with terms ranging from twenty-eight days up to ten years, depending on what your bank or credit union offers. You may incur an early withdrawal penalty if you need to withdraw your money before the maturity date.
CDs are often considered safe investments as the depositor has no way of losing the initial deposit, unlike with mutual funds, for example.
The biggest drawback to CDs is a lack of liquidity – your money is virtually locked away for a set period of time. This lack of access to your money complicates things should unforeseen expenses arise as it cuts off your money supply unless you pay a penalty fee.
Demand Deposit Fees
Demand deposit accounts are known to pay out little to no interest, but you may also need to pay fees for this type of bank account. Different commercial banks and credit unions have their own set of rules and fees.
Some examples of demand deposit account fees are:
- Monthly maintenance fees
- Overdraft fees
- Fees for using out of network ATMs
- Minimum account balance fees
Online banks usually offer their customers lower fees or completely free checking and savings accounts. The fact that online banks have lower overhead costs when compared to brick and mortar banks might have a lot to do with it. Interest rates offered by online banks are still relatively low on checking and savings accounts when compared to CDs, for example.
Deciding which type of bank account makes the most sense is often tricky. DDAs simplify matters for those who need easy access to their money. They are designed to give you total control over your spending without restrictions or waiting time for funds to become accessible.
Pros & Cons of Demand Deposit Accounts
- Debit card and checkbooks
- Online banking
- Immediate transactions through bank tellers
- Easy ATM withdrawals
- Funds are FDIC insured up to the $250,000 limit
- Little to no interest paid out on accounts
- Potential fees like monthly maintenance fees or minimum balance fees
Consider any special offers or incentives banks or credit unions offer when choosing which account is for you. Interest rates or rewards on debit card purchases will make choosing one bank easier.
Frequently Asked Questions
What is a demand deposit account?
A demand deposit account (DDA) is a bank account typically offered by a bank or credit union. Demand deposit accounts give you full access to your money at any time without needing to provide your financial institution with prior notice of withdrawal.
What are the types of demand deposits?
There are many demand deposit accounts. That said, checking and savings accounts are the most common.
Money Market Accounts are like demand deposit accounts though they often have some restrictions. Financial institutions might offer DDAs tailored to particular groups of account holders like senior or student checking accounts, for example.
What is a demand deposit also called?
Some might refer to demand deposit accounts as checking accounts since they are the most commonly available type of DDA.
However, all bank accounts that give you the freedom to access your money whenever you like without prior notice would also classify as demand deposit accounts.
What are the two demand deposits?
The two most common types of demand deposit accounts are checking and savings accounts. There are many other examples of DDAs, but these are the most commonly available.
Are demand deposits an asset?
Demand deposits are one of the most liquid assets available. When choosing to put your money in a demand deposit account, you have the right to access those funds whenever you choose to.
The idea behind demand deposit accounts is for account holders to keep their money safe yet easily accessible at all times.