Woman using an ATM

Having a demand deposit account is the first step many people take when embarking on a savings and investment program. Most consumers start with a checking account and add a savings or money market account over time. These accounts help you in many ways. They are a convenient way to pay your bills on time and get cash. They help you store money and get a return for it. They are important for the economy as a whole because they are part of the money supply. Here are the facts.

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

What is a sight deposit account?

A sight deposit account allows you to deposit money and get it back at any time on demand. Demand deposit accounts do not require any notice to the bank or other financial institution where you are going to withdraw your money.

Demand deposit accounts are important because the money in them is what keeps the economy running smoothly. Consumers use the money in demand deposits to pay bills, make daily purchases, get cash and shop online. Demand deposit accounts do not have a maturity date, unlike term deposits. Term deposits, like certificates of deposit, have a maturity date. There are three main types of demand deposit accounts.

Check accounts

Chequing accounts are the most common type of demand deposit you can open at a financial institution. There is usually no limit to the number of withdrawals and deposits you can make. These are the most liquid accounts of all, more liquid than savings accounts or money market accounts. The price of liquidity in a current account is interest income. They rarely pay much interest, if any. Chequing accounts often have a minimum initial deposit. They are accessible through paper checks, linked debit cards and electronic funds transfers. Most current accounts in the United States 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 types of checking accounts. There are professional and personal accounts. There are no-frills accounts, senior accounts, student accounts, interest-bearing accounts, and reward accounts to name a few. The more benefits a checking account offers, the higher the service charges on that account. A credit union trading account is a demand deposit account and just another type of checking account with a difference. Shared interim accounts mean that you have some ownership in a credit union. They usually don’t have a service charge.

Conventional wisdom is to keep a month’s take home pay in your checking account in an emergency.

Savings accounts

Write a cheque

Write a cheque

The limits of using a checking account and a savings account are gradually blurring. Savings accounts are generally offered by banks as a service to customers. These accounts bear interest and pay interest based on prevailing market interest rates. Market interest rates on this type of account are low. Bank savings accounts have traditionally been used to hold money that you don’t intend to use to pay for daily expenses. This is the role of current accounts. Instead, they are used to store money. Most recommendations are to keep three to six months of take-home pay in your savings account for emergencies.

In addition to savings accounts with your local bank, you can open a savings account online. There are a number of high yield online savings accounts that are FDIC insured, like your local account. In July 2021, the FDIC reported that savings account interest rates were around 0.04%.

Most banks offer NetBanking or MobileBanking with a savings account. They will allow you to send and receive money on a mobile basis. Many banks also offer Billpay so that you can use automatic payments for utilities, credit card payments, and other services. Debit or ATM cards are also provided.

Most banks do not assess service charges on savings accounts. However, you usually have to meet a minimum required balance. If you drop below this minimum balance, you may be charged a service charge.

Since it is simply not possible or safe to carry enough money with you to be considered savings, a savings account can store your money with very low risk. They are FDIC insured just like checking accounts.

Money market accounts

Money Market Accounts (MMA) are the third type of demand deposit account. If you can leave money untouched for more than a year, a money market account may be right for you. There are two differences between an MMA and a bank savings account. The first is the high minimum balance. MMAs can have a minimum balance of up to $ 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 trying to save towards a goal like accumulating enough money to buy a car or make a down payment on a house.

The second difference is that the interest rates on MMAs change every week. Interest rates on savings accounts don’t change that often. MMA interest rates tend to be higher than savings accounts.

MMA, not to be confused with a money market fund, is a demand deposit account suitable for risk averse consumers. Since it is insured for $ 250,000 by the FDIC, the MMA is as secure as savings accounts and certificates of deposit. MMAs have the highest yield of all demand deposits. They have no monthly maintenance fees. If you go over the limit of three checks per month, you usually have to pay a penalty.

MMAs are not as liquid as checking and savings accounts, but they are more liquid than stocks and bonds. You don’t need to find a buyer to get your money back.

Why sight deposits matter

It is not possible for the American consumer to keep their money in cash and pay all of their bills in cash, which is why using sight deposits is the best solution. Demand deposits are important for another reason. Demand deposits represent a large part of our M1 money supply. The level of money supply M1 determines the amount that banks have available to lend to their customers.

The level of sight deposits held by a bank determines the amount it must keep as bank reserves. Any money that banks have above their reserve requirements is their excess reserves. Excess reserves are what banks have available to lend to customers.

The bottom line

Sight deposit activity on a PC

Sight deposit activity on a PC

When you start to learn how to invest, your first investment may be an MMA. You can store money in this demand deposit account for large purchases in a year or two. It is also beneficial to have money to cover emergencies in your checking account and savings account. Once you’ve got your emergency cash in place and you’re on your way to making any major purchases you want, you may want to consider turning to riskier investments that could generate a higher return, like mutual funds, ETFs, stocks and bonds.

All three types of demand deposits are part of the backbone of the US economy since they are part of M1 and are used to calculate bank reserves. Surplus reserves are used to provide loans to consumers. Demand deposit accounts are part of the money creation process.

Tips for saving

  • Use SmartAsset’s savings calculator to see how quickly your savings will grow.

  • Consider working with a financial advisor when determining how much of your money to put in demand deposit accounts and how much to invest in securities. Finding a financial advisor doesn’t have to be difficult. If you use SmartAsset’s financial advisor matchmaker, you will be connected to multiple financial advisors in your area within minutes. If you are ready, start now.

Photo credit: © iStock.com / format35, © iStock.com / fluxfoto, © iStock.com / Younes Kraske

The publication How do sight deposit accounts work? first appeared on the SmartAsset blog.


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