how a reserve fund works
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 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 reserve funds for condominiums or hoashomeowners 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 typically managed in tandem with operating funds which more commonly fund the community s day to day expenses or recurring costs such as housekeeping taxes insurance and utilities condo communities and hoas typically establish and maintain the funds using the dues or hoa fees paid by owners to cover maintenance repairs and other expenses incurred by the community the community association s board usually oversees the funds and decides how to allocate its use for example rather than tapping into the operating fund the board may use part of the reserve fund money to cover biannual insurance payments if a condominium incurs a large expense that the reserve fund cannot cover each member or owner may pay an assessment to cover the cost for example when a condominium s parking garage needs emergency repairs unit owners may be asked for additional funds beyond their regular association dues reserve studies and managing reserve fundsthe 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 the experts consider the age of the property its current state and the amenities it provides as well as project maintenance costs that may be needed in the future because condominiums or hoas do not always fully fund their reserves the final figure determined by a reserve study is only a recommendation the implications of a poorly managed reserve fund can translate to higher dues or assessments for members of a community association so potential buyers should investigate the efficacy of a particular hoa or condominium community before purchasing a home under its jurisdiction 