Today’s variety of banking models offer several options for managing your finances. With so many routes to choose from, it’s important to pick the right type of account for your needs and business goals.
When choosing a checking or savings account for your business, or helping your clients choose the best account for themselves, consider long-term money goals and regular spending habits. Demand deposit accounts and term deposit accounts are two major options that each offer their own benefits.
What Is a Demand Deposit Account?
A demand deposit account (DDA) is an account with a financial institution that allows you to access your money at any time without giving prior notice to that institution. DDA is just another term for a regular checking, savings, or money market account. If you spend the money stored in your bank, you most likely already have a form of a demand deposit checking account.
Accessing money from DDAs can look like spending it by writing checks, transferring it between accounts held by the same institution, or electronically sending it to other people. You can also easily deposit money into a DDA or link your DDA with your debit card.
Institutions rarely require any form of interest in exchange for storing your money in this type of account, though recent regulation changes permit them to do so if they so choose. Some DDAs, such as many regular savings accounts, do offer a small amount of interest.
Rather than earning interest, the primary benefit of demand deposit accounts is that your money is readily available anytime. The convenience of DDAs allows you to spend freely as long as you have the money in your account. For this reason, many people choose DDA accounts as their primary checking accounts for daily spending.
One specific type of DDA is a negotiable order of withdrawal (NOW) checking account. NOW accounts differ slightly from regular DDAs in that they earn interest at a fixed rate. Some financial institutions require between one and seven days’ notice if you plan to make a withdrawal from your NOW account, so you may not always have immediate access to your money.
What Is a Term Deposit Account?
Term deposit accounts are a form of savings account where you temporarily invest money — called a principle — in an interest-earning account for a predetermined amount of time — a “term.” While you won’t have easy access to this money during this time, you will earn a higher fixed rate of interest on this principle than you would keeping it in a regular savings account.
Term deposit accounts are a means of saving money and capitalizing on your unused funds. Instead of withdrawing from this type of account to make everyday payments, you might use a term deposit account to increase your savings over a long period of time.
One type of term deposit account is a Certificate of Deposit (CD). With a CD, you make a lump sum deposit to a financial institution and keep that money in that account for up to several years in exchange for earning high interest rates.
What Are the Pros of Demand Deposit Accounts?
DDAs offer several advantages, especially for people or businesses wanting flexibility and freedom in their spending and saving habits. The benefits of DDAs include:
- Easy, instant access to your money at any time
- Usually no eligibility requirements
- Usually no withdrawal or transfer limits
- Can have joint owners — two people who use the account at the same time and can spend from it independently of each other
- Easy access to money from paychecks for people enrolled in direct deposit programs
What Are the Cons of Demand Deposit Accounts?
DDAs are great for everyday financial management, but there are a few drawbacks and limitations to keep in mind, including:
- Some DDAs have minimum balances, meaning if your balance drops below a certain amount, you may have to pay a fee
- Some DDAs, such as NOWs, require a small amount of advance notice to withdraw or transfer funds, although this is rare for accounts such as regular checking and savings accounts
- Most DDAs don’t pay interest, with the exception of NOWs
- NOWs are only available to individuals, governmental units, and nonprofits
What Are the Pros of Term Deposit Accounts?
Term deposit accounts are an enticing option for saving money in the long run. The advantages of term deposit accounts include:
- Guaranteed interest payments
- Fixed interest rates that can be several times higher than those in regular savings accounts
- Higher interest rates the longer you agree to keep the money in your account
What Are the Cons of Term Deposit Accounts?
While term deposit accounts provide high returns on your savings, they have some disadvantages, including:
- You must wait for the predetermined maturity time to elapse before you can easily access your money. Maturity times vary depending on the type of account you choose.
- The penalty for withdrawing funds before the end of the agreed-upon time is a fine that may cut into your initial principle.
Which One Is Right for You?
Choosing which type of account to use for your business or offer to your clients depends on your company’s financial goals as well as what type of clients you serve.
If you need or want to have all your money available to spend, send, or transfer at any time, a demand deposit account may be the best option for you. If you’re a nonprofit or an individual looking to still earn a little interest on your disposable income, you may consider a negotiable order of withdrawal account.
If a business has the means to contribute high amounts of interest for clients, a term deposit account may be helpful to offer. Additionally, if you or your clients have an amount of money you can afford to set aside for several months to years, an account such as a CD can help you earn more interest on funds you’ll be saving anyway.
Let Hydrogen Help Build Your Financial Strategy
Demand Deposit Accounts and Term Deposit Accounts offer numerous benefits. Depending on how your business is looking to manage its own finances, or what it’s looking to offer to your clients, Hydrogen can help.
Hydrogen debit cards are enabled as Demand Deposit Accounts (DDAs). So, if you, or your clients, want to deposit payroll directly to Hydrogen debit cards, you can do so quickly and easily. Sign up today to receive instant access to our award-winning embedded finance platform!