How Do Demand Deposit Accounts Work?

Having a demand deposit account means being able to deposit, withdraw and transfer money whenever you need to.. Most consumers begin with a checking account and add a savings account or a money market account as time passes. They are a convenient way to pay your bills on time and get cash.

A financial advisor can help you coordinate your checking, saving and investing programs to maximize their efficiency.

What Is a Demand Deposit Account?

A demand deposit account allows you to deposit money and retrieve it at any time on demand. Demand deposit accounts require no advance notice to the bank or other financial institution from which you are going to withdraw your money.

Demand deposit accounts are important because the money available in them is what keeps the economy running smoothly. Consumers use money that is in demand deposits to pay bills, make everyday purchases, get cash and make purchases online. Demand deposit accounts have no maturity date, unlike time deposits. Time deposits, like certificates of deposit, have a maturity date. There are three major types of demand deposit accounts.

Checking Accounts

Checking accounts are the most common type of demand deposit. There is usually no limit to the number of withdrawals and deposits you can make. They are the most liquid of all accounts, but they seldom pay much, if any, interest. Checking accounts often have a minimum initial deposit. They can be accessed through the use of paper checks, linked debit cards, and electronic funds transfer. Most checking accounts in the U.S. are held at banks or other financial institutions that are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).

There are many different types of checking accounts. There are business and personal accounts. There are no-frills accounts, senior citizen accounts, student accounts, interest-bearing accounts, and reward accounts to name a few. The more benefits a checking account offers, the higher the service fees tend to be. A share draft account at a credit union is a demand deposit account and just another type of checking account with one difference. Share draft accounts signify that you have some ownership in a credit union. They typically have no service charges.

The conventional wisdom is to keep one month’s take-home pay in your checking account in case of emergency.

Savings Accounts

Savings accounts are usually offered by banks and pay interest based on the prevailing market interest rates. Bank savings accounts are traditionally used to hold money that you do not intend to use to pay daily expenses. Most recommendations are to hold three to six months of take-home pay in your savings account in case of emergency. The FDIC insures savings accounts up to $250,000, just like checking accounts.

Along with savings accounts at your local bank, you can open a savings account online. There are a number of online, high-yielding savings accounts insured, like your local account, by the FDIC. As of May 2025, the FDIC reported that savings account interest rates were around 0.42%.

Most banks make it possible for you to send and receive money through a mobile app or website. Many banks will also offer Billpay so you can use automatic payments for utilities, credit card payments, and other services. Debit or ATM cards are also provided.

Money Market Accounts

Money market accounts (MMAs) are the third type of demand deposit account. If you can leave some money untouched for more than one year, a money market account may be for you. There are two differences between an MMA and a bank savings account. The first is the high minimum balance. MMAs may have a minimum balance of as much as $5,000. Most savings accounts have very low minimum balances.

The high minimum balance on an MMA makes this type of account good for those who are trying to save toward a goal like accumulating enough money to buy a car or make a down payment on a house.

The second difference is that interest rates on MMA’s change weekly. Savings account interest rates do not change that frequently. MMA interest rates tend to be higher than those for savings accounts. As of May 2025, the FDIC reports a national average of 0.62$ APY for money market accounts.

The MMA, which should not be confused with a money market fund, is a demand deposit account that is good for risk-averse consumers. Since it is insured for $250,000 by the FDIC, the MMA is as safe as savings accounts and certificates of deposit. MMAs earn the highest return of all demand deposits. MMAs are not quite as liquid as checking and savings accounts, but they are more liquid than stocks and bonds.

Why Demand Deposits Are Important

It isn’t feasible for the American consumer to keep their money in cash and pay all their bills in cash, so using demand deposits is the next best thing. Demand deposits are important for another reason. Demand deposits are a large part of our currency supply and determines how much banks have available to loan out to their customers.

The level of demand deposits held by a bank determines how much it should keep on hand as reserve requirements. Any money that banks have above their required reserves is their excess reserves. Excess reserves are what banks have available to loan to customers.

How to Choose a Demand Deposit Account

When choosing a demand deposit account, start by considering how often you need access to your money. If you plan to use the account for daily transactions like paying bills, making purchases, or withdrawing cash, a checking account is likely the best fit. Checking accounts offer the most flexibility with unlimited transactions and easy access through debit cards, checks, and electronic transfers. However, they usually offer little to no interest.

If your goal is to save money while still keeping it accessible, a savings account or a money market account may be more appropriate. Savings accounts are suitable for storing emergency funds or short-term goals and typically have low minimum balance requirements. Money market accounts often offer higher interest rates than regular savings accounts, but they may also require a higher minimum balance and limit the number of transactions per month.

You’ll also want to compare fees, interest rates, and account features across different banks and credit unions. Some accounts come with monthly maintenance fees or overdraft charges, while others waive fees if you meet certain balance or deposit requirements. Be sure to choose an account that aligns with your financial habits and helps you manage your money efficiently.

Bottom Line

When you first start learning how to invest, your first investment may be an MMA. You may store money in that demand deposit account for large purchases that are a year or two away. It also pays to have money to cover emergencies in your checking account and savings account. After you have your emergency money in place and you are well along your way to making any large purchase that you want, then you can consider moving into riskier investments that could yield a higher return like mutual funds, ETFs, stocks and bonds.

Tips on Saving

Use SmartAsset’s savings calculator to see how quickly your savings will grow.
Consider working with a financial advisor as you consider how much of your money to put in demand deposit accounts and how much to put into investment securities. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.