# Understanding Reserve Funds: Definition, Purpose, and Key Examples

> **Definition**
>
> A reserve fund is a savings account or liquid asset set aside by individuals or organizations to cover unexpected costs or future financial obligations.

## What Is a Reserve Fund?

A reserve fund is a savings account or other highly [liquid asset](https://www.investopedia.com/terms/l/liquidasset.asp) designed to cover future, unpredictable expenses. Reserve funds are used by different entities like governments, financial institutions, and individuals for managing both planned upgrades and unexpected financial needs.

Reserve funds have the advantage of accruing interest over time and enhancing financial stability, preparedness, and security. For example, a [homeowner's association](https://www.investopedia.com/terms/h/hoa.asp) often manages a reserve fund to help maintain the community and its amenities using the dues paid by homeowners. Pension funds invest the money on behalf of their fund's members so it can be paid out during retirement.

### Key Takeaways

*   A reserve fund is a savings or liquid asset account reserved for unexpected costs or future financial obligations.
*   Such funds are often kept in highly liquid accounts to ensure availability for unforeseen expenses.
*   Homeowners' associations and condos use reserve funds for large maintenance projects and emergency repairs.
*   Regular fund deposits help increase the reserve fund's value and prepare for both routine and unexpected expenses.
*   Reserve studies by independent consultants help determine appropriate fund levels for property upkeep.

## Understanding the Mechanics of Reserve Funds

A reserve fund sets aside money for covering scheduled, routine and unscheduled expenses that would otherwise be drawn from a general fund. Governments, financial institutions, and private households may establish reserve funds.

Although the fund size may vary, the typical goal is to deposit funds regularly in an account that accrues interest, thereby increasing the fund's value while not in use. Because expenses may arise unexpectedly, a reserve fund is typically kept in a highly liquid account, such as a [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp).

In pension funds, for example, money is invested on behalf of a fund's members and later paid out during retirement. When working employees sign up for a pension fund, they put money into a reserve fund that is used to ensure money is available for other employees who signed up to receive a payout when they retire.

## Utilizing Reserve Funds in Condominiums and HOAs

Homeowners' associations and condominiums often use reserve funds in the event of large-scale maintenance or renovation projects, as well as for any costly community emergencies. Reserve funds are usually managed along with operating funds, which cover daily and recurring community expenses like housekeeping, taxes, insurance, and utilities.

Condo communities and HOAs usually use dues or [HOA fees](https://www.investopedia.com/terms/h/homeowners-association-fee-hoa.asp) paid by owners to establish and maintain these funds for maintenance, repairs, and other community expenses. The community association's board usually oversees the funds and decides how to allocate its use. For instance, the board might use reserve funds for biannual insurance payments instead of the operating fund.

If the reserve fund can't cover a large expense, condo owners may need to pay an [assessment](https://www.investopedia.com/terms/a/assessment.asp). If a condo's parking garage needs emergency repairs, unit owners might be asked for extra funds beyond their regular dues.

## Effective Management and Analysis of Reserve Funds through Reserve Studies

The best way to avoid a special assessment is to ensure the building’s reserve fund is well-equipped with enough money to handle expenses, including those that are unexpected. Often, HOA boards determine how much money should go into their reserve fund supply via a reserve study, where independent consultants assess the state of a property and make recommendations for the reserve fund based on physical and financial analysis.

Experts assess the property's age, condition, amenities, and future maintenance costs. Because condominiums or HOAs do not always fully fund their reserves, the final figure determined by reserve study is only a recommendation. A poorly managed reserve fund can lead to higher dues or assessments, so potential buyers should research an HOA or condo community before buying a home there.