What is a 'Reserve Fund'

A reserve fund is a savings account or other highly liquid asset set aside by an individual or business for meeting the future costs of upkeep and any unexpected costs that may arise. If the fund is set up to meet the costs of scheduled upgrades, less-liquid assets may be used. For example, condominiums often set up reserve funds in which condo owners pay a set monthly amount to maintain the quality of the condominium.

BREAKING DOWN 'Reserve Fund'

A reserve fund sets aside money for covering scheduled, routine and unscheduled expenses that would otherwise be drawn from the general fund. For example, a pension fund lets employees sign up and receive a payout during retirement. Working employees put money into the reserve fund to ensure money is available when they retire. The money is invested on behalf of members of the fund and paid out during retirement.

Goal of a Reserve Fund

Governments, financial institutions and private households may establish reserve funds. Although the fund size may vary, the typical goal is depositing funds on a regular basis so they accrue interest, and the fund increases in value. Expenses may be paid out of the reserve fund rather than general funds.

Because one does not know when expenses may arise, a reserve fund is typically kept in a highly liquid account. For example, a household may maintain a savings account for covering unexpected expenses.

Reserve Fund for a Condominium

A condominium typically establishes a reserve fund that owners pay dues into for covering maintenance, repairs and other expenses related to operating the building. For example, the board may use part of the reserve fund money for covering biannual insurance payments. Part of the fees pay for ongoing costs such as landscaping, whereas some fees cover one-time expenses such as painting exterior walls.

If a condominium incurs a large expense the reserve fund cannot cover, each unit owner pays an assessment for covering the cost. For example, when the parking garage needs repairs, unit owners may be asked for additional funds beyond their regular association dues.

The best way of avoiding a special assessment is making sure enough money is in the building’s reserve fund. The board of directors (BOD) should conduct a reserve study with experts coming in and looking at the property. The experts consider the age of the building, the state it is in, and the amenities it provides, as well as project maintenance costs that may be needed in the future. Because condominiums do not always fully fund their reserves, the final figure is only a recommendation.

RELATED TERMS
  1. Capital Reserve

    A type of account on a municipality's or company's balance sheet ...
  2. Reserve Ratio

    The portion (expressed as a percent) of depositors' balances ...
  3. Cash Reserves

    In finance, cash reserves primarily refers to two things. One ...
  4. Primary Reserves

    The minimum amount of cash required to operate a bank. Primary ...
  5. Bank Reserve

    Bank reserves are the currency deposits which are not lent out ...
  6. Federal Reserve Credit

    Refers to the process of the Federal Reserve lending funds on ...
Related Articles
  1. Financial Advisor

    5 Characteristics of Strong Mutual Fund Shares

    Discover some of the basic characteristics shared by good mutual funds that investors can use to help them in selecting funds.
  2. Financial Advisor

    Money Market Mayhem: The Reserve Fund Meltdown

    This event serves as a stark reminder to investors about understanding their portfolios.
  3. Investing

    4 Money Misconceptions About Condominiums

    Condo fees and special assessments scare many owners away from condo ownership, but is this fear justified?
  4. Investing

    Breaking The Buck: Why Low Risk Is Not Risk-Free

    Money market funds have been assumed to be safe investments, and they are - but only to a point.
  5. Investing

    Mutual Funds: Does Size Really Matter?

    The growth of mutual funds isn't always cause for celebration. Read on to find out why.
RELATED FAQS
  1. How are bank reserve requirements determined and how does this affect shareholders?

    Learn how bank reserve requirements are determined and how bank reserves affect shareholders through improved bank stability ... Read Answer >>
  2. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  3. Does it make sense for me to have a money market account if I don't want to buy any ...

    Saving funds within a money market account or mutual fund does not have to be limited to those wanting to buy or sell securities ... Read Answer >>
  4. Who determines the reserve ratio?

    Understand what the Federal Reserve is and what it regulates in the U.S. economy. Learn about the reserve ratio and how the ... Read Answer >>
  5. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  6. What do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>
Hot Definitions
  1. Financial Statements

    Records that outline the financial activities of a business, an individual or any other entity. Financial statements are ...
  2. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  3. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  4. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  5. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  6. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
Trading Center