What is a Demand Deposit?

A demand deposit is a bank account that can be withdrawn at any time, typically without advance notice. If you have an open bank account, there's a good chance it's a demand deposit account. 

Demand deposit funds generally are used for everyday transactions like ATM withdrawals, debit card transactions, and online shopping. 

Negotiable Order of Withdrawal (NOW) accounts are a type of demand deposit account, except more restrictive. With Now accounts, financial institutions can require up to seven days' notice on withdrawals. 

Demand deposits make up a portion of the M1 money supply calculated by the Federal Reserve, which in itself is a portion of the total money supply in the U.S. 

How do Demand Deposit Accounts Work?

Demand deposit accounts allow the depositor to withdraw funds at any time. There is no limit to the number of transactions allowed on demand deposit accounts within a statement period. 

Under Federal Reserve Regulation D, some demand deposit accounts, like savings accounts, are subject to limits on specific transaction types. Banks may charge an excessive transaction fee or close your account if you exceed the limit. Depositors still have unlimited access to other transaction types, like in-person and ATM withdrawals. 

Only the deposit account balance and your bank's daily ATM withdrawal limits determine how much a depositor can withdraw at any given time. Some banks may charge a fee on certain transactions. 

Federal Reserve Regulation Q originally prohibited banks and other financial institutions from paying interest on demand accounts. The regulation was, however, repealed by the Federal Reserve in 2011

Traditionally, interest-bearing demand deposit accounts earned lower interest rates than timed or term deposit accounts. An increasing shift to online banking has opened up the door to higher rates on demand deposit accounts like savings and checking accounts.

Examples of Demand Deposit Accounts

There's a good chance that you have a demand deposit account, whether you realized it or not. 

Checking accounts are demand deposit accounts meant for everyday banking. Most banks don't pay interest on checking accounts, although there are exceptions, especially with online checking accounts. They often come with a checkbook and a debit or ATM card for easy access to funds on demand. 

Savings accounts are demand deposit accounts that earn interest. Financial institutions pay customers interest for keeping deposits in savings accounts. 

Unlike timed deposit accounts, such as CDs, savings account funds are still easily accessible online, in person, and at ATMs. 

Accounts that are not Demand Deposit Accounts

Banks and other financial institutions offer term deposit accounts, also known as timed deposit accounts. 

These are accounts that restrict access to funds for a predetermined time. A well-known example of this is a certificate of deposit (CD). When you open a CD account, you agree to leave your money untouched in the account for a period of time, typically between three months and five years, although shorter and longer CD term lengths exist. 

In return, the bank pays you back through higher interest rates. CD funds withdrawn before the maturity date are subject to early withdrawal penalties. 

Bonds aren't considered demand deposit accounts either. They are a type of debt, similar to an IOU. When you purchase a bond, the issuer agrees to pay you an agreed-upon interest rate along with repaying the principal amount after a set time. 

Depending on the financial institution, money market accounts may or may not be considered a demand deposit account. Money market accounts are hybrid bank accounts that offer interest-earning benefits of a savings account with some of the accessibility of a traditional checking account. These accounts face the same federal transaction limits as savings accounts.

Federal Regulation D limits savings deposit accounts to six convenient transfers or withdrawals per month. Recently, the Fed suspended this transaction limit due to the pandemic, although some banks have left it intact. 

Features of Demand Deposit Accounts

One of the primary indicators of a demand deposit account is its liquidity, or how accessible its funds are at any given time. Accessibility is important because consumers use demand deposit accounts to pay for day-to-day expenses. Having access to your deposits immediately means you're able to make purchases and pay expenses in real-time without having to alert your bank in advance. 

Other markers of a demand deposit account include having no maturity date and no eligibility requirements. Also, demand deposits may earn interest, but it's not a requirement. 

Should You Have a Demand Deposit Account?

It's a good idea for most people to have a demand deposit account. 

They are designed for everyday spending. If you need to access funds regularly, whether to pay bills, make purchases, or make other transactions, the best way to do that is through a demand deposit account like a checking account. 

How Demand Deposit Accounts Affect the M1 Money Supply

The money supply is the amount of money in our economy. The M1 money supply is the portion of the whole money supply that contains its liquid assets. This is an economy's currency and other assets that can be quickly converted to cash. Demand deposits fall under this category. As of March 23, 2021, the total amount of demand deposits in the U.S. is $3.76 trillion.

The amount of demand deposits an institution has often dictates all or part of the reserves it must keep on hand either in vault cash or on deposit with the Federal Reserve. The more dollars an institution has in demand deposits, the more dollars it must keep in reserves.
 

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All of our content is verified for accuracy by Mark Herman, CFP and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Demand Deposit.

What is the Difference Between a Demand Deposit Account and a Time Deposit Account?

The primary difference between a demand deposit and a timed deposit account is the accessibility of the account funds. 

Funds in a demand deposit account are withdrawable at anytime. A timed deposit account, like a CD, requires that you keep deposits untouched for a predetermined period, often in exchange for higher interest rates. Most financial institutions charge an early withdrawal penalty if you withdraw deposited funds before the maturity date. 

Mark Herman has been helping friends with financial questions since serving as an Army helicopter pilot. Since then, he’s gained valuable experience in the corporate world before moving on to become a Certified Financial Planner™.

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