What Is A Reserve Fund?
A reserve fund is a savings scheme or any other liquid resource placed aside by an individual or corporation to meet any possible expenditures or financial commitments, particularly those which arise suddenly. Reserve funds are often used by companies, individuals, and condominium homeowners’ organizations.
The purpose of a reserve fund is to cover unanticipated demands. Less liquid assets are frequently employed until a particular amount of capital is set aside to pay for such expenditures. A homeowner’s association, for instance, has a contingency fund to assist a member of the association and its amenities using the money collected from residents’ dues.
They can also be used to pay regular and planned costs. Deposits are normally made on a regular basis. Withdrawals are not made so as to allow the fund to grow, although the reserve can be withdrawn when needed.
The purpose of a reserve fund is to deposit funds sporadically into a record that accrues interest. This is regardless of the asset’s size. Costs might arise out of nowhere, a contingency reserve is usually kept in a liquid asset. An example of this would be a savings account.
You can create a reserve fund in a separate bank account or track it in your present bookkeeping software. It will be easier to track how much you withdraw and deposit after a certain interval of time when you maintain it in a separate account.
You’ll need to plan ahead of time when you’ll use the reserve money. Decide who has the authority to make that decision. Keep a finance team ready to help you if you are a business person or hold a top position in the firm and are putting up reserve money.
You can also decide a certain percentage of your total income when planning on how to deposit your reserve fund.
Reserve Fund Example
At the large company Coca-Cola, money is put in pension funds on behalf of employees. It is then paid out after retirement. Workers enroll in a pension plan and contribute money to a savings account. This is used to ensure that the money is available to future employees who sign up for payment when they retire.« Back to Glossary Index