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Demand deposit accounts are the most common type of bank account, and most Americans have one or more of them. They provide easy access to your money, making them suitable for storing emergency savings as well as paying bills, writing checks, and making debit card purchases.
Definition of current account
A demand deposit account is another term for a checking, savings, or money market account. The money in these accounts is very liquid and you will be able to withdraw funds at any time without paying any penalty to the bank. (However, under Regulation D guidelines, banks may charge you a small fee if you exceed a set number of withdrawals in a month.)
Demand deposit accounts are offered by most banks and credit unions. Some of these accounts earn interest, although the rate is often minimal to modest.
Types of current accounts
A savings account is a demand deposit account that usually earns a small amount of interest. The annual percentage yield (APY) earned on a savings account is variable, which means that the bank can increase or decrease it at any time.
While savings accounts from big banks usually pay very low returns, anyone looking for significantly higher rates will often find them at online banks.
A savings account is a good place for your emergency fund, because you can easily access the money when unexpected expenses arise. Many savings accounts charge very little or no fees.
Money in a savings account is federally insured up to $250,000 per account holder, per ownership class, when a bank or credit union is federally insured. Federal Deposit Insurance Corporation. (FDIC) insurance or National Administration of Credit Unions (NCUA).
A current account usually an integral part of your personal finances, as this account allows you to deposit paychecks, pay bills, make debit card purchases, send money to others, and withdraw money.
Unlike a savings account, a checking account is a type of demand deposit account that does not limit the number of transactions you can make without paying fees. Like savings accounts, checking accounts are often covered by FDIC or NCUA insurance.
Money market accounts
Like savings accounts, money market accounts are interest-bearing accounts, but they often have some of the features associated with checking accounts. These may include check writing privileges and debit cards.
Since money market accounts are not primarily designed for frequent cash in and out, you will likely encounter limits on the number of withdrawals you can make in a month.
Current accounts vs term accounts
Term accounts, also known as fixed term accounts, are designed to hold your money for a set period of time. Withdrawing your money from such an account before the end of the term usually results in a penalty. In exchange for locking up your money, term deposit accounts often offer higher returns than demand deposit accounts.
A certificate of deposit (CD) is an example of a futures account. CDs come with terms usually ranging from three months to 10 years. They usually feature guaranteed fixed rates, so the APY your money earns will stay the same throughout the term. Locking your money at a fixed rate can be beneficial in a falling rate environment, but it may not be a good idea at a time when rates are rising, depending on your personal situation.
Like demand deposit accounts, funds in term deposit accounts can be protected at financial institutions covered by the FDIC or NCUA.
Term deposit accounts such as CDs are not the right place for an emergency fund, as you will likely have to pay an early withdrawal penalty if you need access to the money before the term expires. .
Current accounts vs term accounts
|Current account||Term account|
|Blocks funds for a fixed term||Nope||Yes|
|Type of interest earned||Variable or none||Fixed|
|Possibility of FDIC or NCUA insurance coverage||Yes||Yes|
At the end of the line
Most Americans have one or more term deposit accounts in the form of a checking account, savings account, or money market account. These accounts are highly liquid, making them useful for your emergency fund as well as managing your day-to-day finances.
You can find a term deposit account, such as a CD, that pays a higher APY, but that’s often in exchange for locking up your funds for a set period of time. Before deciding which type of account is best for you, you will need to carefully consider how you plan to use the account as well as your financial situation.