How Do Bank Deposits Work?

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Whether you have your paycheck direct deposited or you carry a jarful of pennies into the bank, how much do you really know about bank deposits? Learn what happens to the money you put in the bank and find out how you can get it out when you need it. Hint: It might not be as easy as you think.

What Are Bank Deposits?

When you deposit money into your account at a financial institution, you give the institution use of your money to make loans in exchange for its promise to pay you back. One way the bank makes money on this arrangement is by charging a higher interest rate on the loans it makes than it pays you on the money in your account.

Bank deposits are assets for the depositor because deposits represent money that’s owed to them. The deposits are liabilities to the bank because they represent money the bank must return.

There are several different types of deposit accounts, but just two main types of bank deposits:

• Demand deposit: A demand account lets you withdraw your money on demand. That means you don’t lose access to it even if the bank borrows it to make loans.
• Time deposit: A time deposit must stay in the account for a certain length of time. You’re unable to access your funds during that period.

Understanding the Types of Bank Deposits

Deposits might be treated a little differently depending on the type of bank account you have. Here’s a look at the types of bank deposit accounts that are available and how each handles deposits.

Checking Accounts

A checking account — also known as a current account in some parts of the world — is a demand deposit account. Some, but not all, checking accounts pay interest.

You can withdraw money from this type of account in a number of different ways:

• Go to the bank to make a withdrawal using a withdrawal slip.
• Write a check to yourself or to someone else. When the bank receives the check, it provides the funds to the person whose name is on the check.
• Use your debit card at an ATM.
• Make a purchase with your debit card at a point-of-sale terminal. The cost will be deducted from your account by the merchant.

Note that checking accounts aren’t the only accounts that let you write checks. You can also write checks on money market accounts, home equity lines of credit and other credit line accounts.

When you deposit a check, the bank might hold the check for several days before the funds can be withdrawn, but the first $225 of the deposit is usually available by the next business day and the rest of the deposit the day after that. Each bank has its own rules, so check with your bank for its requirements.

Credit unions sometimes refer to their checking accounts as share draft accounts. These accounts are a form of ownership, as credit unions are owned by their members. By contrast, at banks, checking account holders are customers, not owners.

Savings Accounts

A savings account is a demand account that typically earns interest. When you deposit money into a savings account, it earns interest based on the balance in the account each day, and the interest is credited to your account each month. Savings accounts are used to save money for an emergency or for long-term goals.

Federal law used to restrict the number of convenience withdrawals you could take from your savings account to six per statement period. Although the Federal Reserve suspended that restriction last year, banks are still allowed to impose it.

Certificates of Deposit

A certificate of deposit, or CD, is a time deposit account. When you open a CD, you select a term specifying how long you will keep the money on deposit at the bank. Money kept in the bank longer typically earns a higher rate of interest.

On the maturity date, which is the end of the term, the bank returns the money along with the amount of interest agreed to when you opened the account. You might have to pay a penalty if you withdraw the money before the maturity date.

Money Market Accounts

A money market account is a deposit account that can be used as a savings account with limited check writing and debit card privileges. A money market account’s main advantage is that it features a higher interest rate than a typical savings account. Although your bank might limit you to six withdrawals or checks per month, ATM, in-person and phone transactions are usually exempt.

A money market account is different from a money market fund, which is an investment and could lose money.

Good To Know

There’s no limit on how much money you can deposit into your deposit accounts. However, anti-money-laundering laws require banks to report deposits larger than $10,000 — or multiple deposits totaling over $10,000 in a single day. Also, keep in mind that FDIC insurance (NCUA insurance in the case of credit unions) only covers up to $250,000 per person, per financial institution.

Bottom Line on Bank Deposits

Whether you walk into a branch or use online banking, bank deposits are a good way to keep your money safe and earn a little interest. By depositing money in the bank, you ensure it will always be there when you need it — even if you have to wait a few days to get it.

Daria Uhlig contributed to the reporting for this article.

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