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Reviewed by Jul 26, 2021| Updated on
A reserve fund is a savings account or other highly liquid asset that a person or company has set aside to cover any potential costs or financial obligations, especially those that occur unexpectedly. Unless the fund is formed to cover the cost of planned improvements, less liquid assets can be used. A homeowner's association, for example, also maintains a contingency fund to help support the neighbourhood and its facilities using homeowners' dues charged.
A contingency fund sets aside funds that would otherwise be taken from a general fund to cover planned, regular, and unscheduled expenditures. Reserve funds can be developed by governments, financial institutions, and private households.
Although the size of the fund may vary, the standard aim is to deposit funds periodically into an account that accumulates interest. Thus, the value of the fund when not in use. Since expenses may arise unexpectedly, usually a contingency fund is held in a highly liquid account, such as a savings account.
For example, money is deposited in pension funds on behalf of members of a fund and then paid out after retirement. When working, workers sign up for a pension plan, they put money into a savings fund which is used to ensure the money is available to future employees who sign up for a payout when they retire.
Homeowners' associations and condominiums often use contingency funds for large-scale repair or renovation programmes, as well as for any expensive community-related emergencies. Usually, reserve funds are operated in conjunction with operating funds, which more commonly finance the regular expenditures or ongoing costs of the society, such as housekeeping, taxes, insurance, and utilities.