A reserve fund is a savings account or another highly liquid asset set aside by an individual or business to meet future costs or financial obligations, particularly unexpected ones. For example, if the fund is created to cover scheduled upgrades, less liquid assets may also be appropriate. Homeowners’ associations often manage a reserve fund to help maintain community amenities using the dues paid by homeowners.
Key Takeaways
- A reserve fund consists of savings or liquid assets set aside for covering unexpected costs or future financial obligations.
- Many governments, financial institutions, and individuals regularly set aside funds into accounts that earn interest.
- Pensions serve as reserve funds, where money is invested on behalf of members and paid out in the future.
- Homeowners’ associations (HOA) and condominiums utilize reserve funds to address maintenance issues and handle large-scale projects.
How a Reserve Fund Works
A reserve fund sets aside money to cover both routine and unscheduled expenses that might otherwise pull from general funds. They are established by governments, financial institutions, and private households.
The typical goal is to regularly deposit funds in an account that accrues interest, thereby increasing its value over time. Due to the possibility of immediate need, a reserve fund is often kept in a highly liquid account, such as a savings account.
For example, in pension funds, money is invested on behalf of members and later paid out upon retirement. Employees signing up for pension plans contribute to a reserve fund, ensuring money is available for other employees scheduled to receive payouts.
Reserve Funds for Condominiums or HOAs
Homeowners’ associations and condominium associations often rely on reserve funds for major maintenance projects, renovations, and costly emergencies. These funds are typically managed together with operating funds that cover regular community expenses such as housekeeping, taxes, insurance, and utilities.
Condo communities and HOAs maintain these funds through dues, also known as HOA fees, paid by owners. These funds cater to maintenance, repairs, and other community expenditures. The community association’s board typically oversees the funds and decides their allocation, such as utilizing reserve funds for biannual insurance payments instead of tapping into the operating fund.
Should a condominium incur a large expense beyond the reserve fund’s capacity, members or owners might face an assessment to cover costs. For instance, in an emergency repair for a parking garage, unit owners may need to contribute additional funds separate from regular association dues.
Reserve Studies and Managing Reserve Funds
One way to handle special assessments is by ensuring the reserve fund is well-equipped to tackle all types of expenses, including unexpected ones. Generally, HOA boards determine the necessary fund size from conducting a reserve study. In such studies, independent consultants evaluate the property’s condition and propose recommendations based on physical and financial analysis.
Experts consider factors like the property’s age, its current state, the amenities offered, and anticipated maintenance costs. Although reserve studies provide a figure, it is only a recommendation since condominiums or HOAs may not fully fund their reserves.
Properly managing a reserve fund can prevent increased dues or assessments for community association members. Prospective homebuyers should investigate how effectively an HOA or condominium community manages its reserve fund before finalizing a home purchase in such communities.
Related Terms: savings account, liquid asset, pension funds, emergency fund.
