A reserve fund is a fund which is established for the purpose of covering expenses which will come up in the future. This includes scheduled expenses, routine expenses which can be relied upon to occur, and unexpected expenses. The goal of this type of fund is to make sure that monies are set aside to cover expenses so that these expenses do not require spending general funds. For certain types of enterprises and business, the creation of a reserve fund may be required by law.
A classic example of a reserve fund is the fund associated with a building cooperative or condo association. In such organizations, tenants pay dues which are intended to cover maintenance, repairs, and other expenses related to operating the building. Some of the dues are gathered into a fund which is used to handle known expenses as well as unexpected ones. For example, the cooperative board might be aware that there are biannual insurance payments which must be covered, and it can expect to replace flooring periodically with wear. By saving money to prepare, the board can ensure that these expenses will be easily dealt with when they arise.
Another example of a reserve fund is a pension fund. In some industries, employees have an opportunity to sign up with a pension plan which provides payouts in their retirement. Payments from employees who are working are put into the reserve fun to ensure that funds will be available when they retire and expect payouts. It is common to invest these monies on behalf of members of the fund.
Reserve funds are also established by governments, financial institutions, and private households. The size of such a fund can vary, but the general goal is to deposit funds into the reserve on a regular basis so that they will accrue interest and allow the fund to grow with time. When expenses arise, they can be paid out of the reserve money, rather than forcing people to struggle to meet expenses with general funds.
Typically a reserve fund is kept in a highly liquid format because one never knows when expenses will arise. A household, for example, could maintain a savings account to cover unexpected expenses. Something like a certificate of deposit would not be a good choice for setting aside money because penalties must be paid if it is cashed in early. People are often encouraged to put some money in longer term investments to think far into the future, while keeping other savings funds in a liquid reserve fund for immediate expenses or expenses which are likely to arise in the next few years.
