What is a demand deposit (DDA)?
– A demand deposit is money held in an account that the owner can take out at any time without advance notice. Banks and credit unions usually offer this access for day-to-day spending and bill payments. Common account types that function as demand deposits are checking accounts and many savings accounts; some money market accounts can also act like DDAs.
Key points (short)
– Immediate access: funds are available “on demand” via teller, ATM, debit card, check, or online transfer.
– Liquidity vs return: the convenience
Liquidity vs return: the convenience of immediate access usually means lower interest. Demand deposit accounts (DDAs) prioritize liquidity and payment convenience over yield. Banks and credit unions typically pay little or no interest on these accounts because funds must be available on demand; higher yields are available in time-based products (certificates of deposit, fixed-term deposits) that require notice or lock-ups.
How demand deposits work
– Access and settlement: funds in a DDA are available through tellers, ATMs, debit cards, checks, mobile/online transfers, and bill-pay systems. When you withdraw or spend, the bank debits your account and uses internal bookkeeping and interbank settlement systems (e.g., Automated Clearing House, checks clearing) to move funds.
– Bank balance-sheet treatment: for the customer, the account is an asset; for the bank, it is a liability (a promise to repay on demand).
– Regulation and limits: historically, Regulation D shaped withdrawal limits on certain savings-type accounts; enforcement changed in 2020 and banks set specific policies. Federal deposit insurance (FDIC for banks, NCUA for credit unions) protects balances up to insured limits.
– Common DDA forms: non-interest and interest-bearing checking accounts, negotiable order of withdrawal (NOW) accounts, many everyday savings accounts, and some money market deposit accounts (not to be confused with money market mutual funds).
Numeric example — opportunity cost of liquidity
Assume you hold $10,000 in a DDA paying 0.05% annual percentage yield (APY) versus putting it in a 1‑year CD at 3.00% APY.
– DDA interest = $10,000 × 0.0005 = $5.00 per year.
– CD interest = $10,000 × 0.03 = $300.00 per year.
– Opportunity cost = $300 − $5 = $295 per year.
Assumptions: simple APY compounding once annually; ignores taxes, fees, early-withdrawal penalties, and potential step-downs in promotional rates.
Practical checklist for choosing a demand deposit account
1. Fees: monthly maintenance, ATM out-of-network, overdraft, paper statement fees.
2. Access: ATM network size, mobile app features, check-writing, online bill pay.
3. Interest: APY on balances and tiers for higher rates; compare with inflation.
4. Minimums and balance requirements: to avoid fees or to earn interest.
5. Insurance: FDIC (banks) or NCUA (credit unions) coverage limits and beneficiary/ownership rules.
6. Overdraft policy: fees, grace periods, overdraft protection options.
7. Customer service and branch availability if in-person service matters.
Step-by-step: how to open and manage a DDA
1. Compare providers on the checklist above and read fee schedules.
2. Gather identification (government ID, Social Security or tax ID, proof of address).
3. Apply online or at a branch; fund the account by transfer, check deposit, or cash.
4. Set up direct deposit for paychecks and link a savings account for automatic transfers.
5. Monitor statements and alerts; reconcile unfamiliar transactions promptly.
6. Re-evaluate periodically — move idle funds to higher-yield options if you can tolerate reduced liquidity.
Risks and regulatory protections
– Liquidity vs inflation risk: low-return DDAs can lose real purchasing power if inflation exceeds interest earned.
– Counterparty risk: deposits up to insured limits are protected by FDIC (banks) or NCUA (credit unions). Amounts above coverage can be exposed if the institution fails.
– Operational risk: fraud, unauthorized access, and payment errors — use strong passwords, two-factor authentication, and monitoring.
Quick definitions
– Liquidity: how quickly an asset can be converted to cash without significant loss of value.
– APY (annual percentage yield): the effective annual rate accounting for compounding.
– Reserve requirement: (historically) the fraction of deposits banks hold as reserves; rules have changed over time.
Useful references
– Investopedia — Demand Deposit Account (overview): https://www.investopedia.com/terms/d/demanddeposit.asp
– FDIC — Deposit Insurance FAQs: https://www.fdic.gov/resources/deposit-insurance/
– NCUA — Share Insurance Coverage: https://www.ncua.gov/consumers/financial-education/know-your-share-insurance
– Federal Reserve — Payment Systems and Money Basics: https://www.federalreserve.gov/paymentsystems.htm
– Consumer Financial Protection Bureau — Bank Accounts & Services: https://www.consumerfinance.gov/consumer-tools/bank-accounts/
Educational disclaimer
This information is educational and not personalized financial advice. It does not recommend specific accounts or predict future rates. Consult a qualified financial professional for decisions about your situation.