What is a Demand Deposit?


Having a checking account is very useful. You deposit your paycheck or other funds and then simply write a check or use your debit card when you want to withdraw money. It’s convenient and a lot safer than carrying around large amounts of cash. A checking account is an example of a demand deposit. You’ll find it helpful (and possibly profitable) to know the definition of a demand deposit and how different types of demand deposit accounts work.


A demand deposit is any account with a financial institution such as a bank or credit union where you can withdraw funds in the account without notifying the account provider in advance. Other types of demand deposit accounts are savings accounts and money market accounts (although these may have some restrictions). In contrast, time deposits like CDs (certificates of deposit) don’t allow you to withdraw funds until the CD reaches maturity (or at least not without incurring interest penalties and fees).


When you deposit funds in a checking account the bank or credit union has to process the deposit. For some deposits like a check drawn on a foreign bank it may take a few days for the deposit to clear and you may not have access to the money until it does. Deposits of cash or electronic funds transfers are normally available for withdrawal within minutes. Deposits like paychecks fall somewhere in between. If the account the check is drawn on is with the same bank, you will normally have immediate access. Otherwise, you may have to wait until the next business day.


Once a deposit is cleared, you can withdraw the money as needed in several ways. You can write a check or use a debit card. Another option that has become very popular is to use online tools to schedule electronic funds transfers from your account to another to pay bills or make purchases. You can also transfer funds between accounts at your bank or credit union. For example, you may move funds directly from your checking account to a savings or money market account at the same bank.


Savings and money market accounts work somewhat differently, but are also considered demand deposit accounts because you may withdraw funds without advance notice. The first difference, of course, is that these accounts pay interest on the funds you deposit. Banks and money market funds do impose some limits on withdrawals on these accounts. There is usually a minimum balance, and you may pay a small fee ($5 is typical) if you drop below the minimum. You are also limited in the number of withdrawals (but not the size) you can make each month without incurring a fee.


Demand deposits can be a powerful tool. With today’s online access capabilities, you can use schedule payments, transfer funds, monitor transactions, and do many other things to manage your money. Savings and money market accounts can be included in IRAs so money not invested elsewhere still earns interest. The most important caution has to do with overdrafts on checking accounts. If you accidentally try to withdraw more money than you have in your account, the bank may or may not choose to allow the withdrawal. Unless you have “overdraft protection” it’s entirely their choice. If this happens, you’ll be assessed a stiff penalty (typically $30-40), whether the bank chooses to go ahead and complete the transaction or not.

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