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A contingency fund is simply a reserve fund set aside to handle unexpected debts that are outside the range of the usual operating budget. This model of maintaining reserve money as protection against possible loss in the event of an emergency situation can be utilized in a number of situations. Governments, private businesses, and even individual households can establish and maintain a contingency fund as part of the overall financial plan of operation.
In a government setting, the contingency fund is often identified as a disaster recovery fund or disaster assistance fund. Generally, the terms of use for the reserve money placed into the fund will be clearly defined. This action makes it possible for local and national governments to provide assistance to citizens and municipalities when some type of natural or economic disaster takes place, provided the event meets the qualifications set in place for the fund. At other times, a government may establish a contingency fund as a backup against possible losses in income from taxes and other revenue sources. When this is the case, the government can draw upon the fund to cover shortfalls in operational costs, keeping key public services such as law enforcement and city services functioning.
Businesses also make use of the contingency fund model. As with governments, many businesses choose to create a fund that can be called upon in the event that income does not meet general business expenses. For example, the fund may be used when unanticipated repairs or replacement of key manufacturing equipment take place. At the same time, it may be used to cover general operational expenses in the event that the sales of the company take an unexpected dip due to natural disasters or political upheavals.
For the home, financial counselors often encourage the establishment of a contingency fund. Many experts will urge households to create and maintain such a fund that contains enough resources to cover the usual expenses associated with the home budget for a period of six months. This level of protection helps to safeguard individuals and families from such unanticipated events as a serious and prolonged illness, loss of a job, or the destruction of the home during a natural disaster.
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.
Are you asking about a reverse or reserve fund? typo error is confusing...But a contingency fund is a reserve fund set aside to handle unxepected expesnes.
