Financial management is not something you should take lightly. It is a life-long process, which begins with saving and investing every rupee you can spare. Sound financial management enables you to grow a corpus and earn inflation-adjusted returns. One of the critical aspects of financial management is creating different funds and cash reserves that you can access easily, whether in an emergency or when you need quick cash. One way to get instant access to money on a rainy day is through reserve funds. Let’s try to define reserve funds, find out how it works, and check out its benefits.
What is a reserve fund?
A reserve fund is a highly liquid corpus that enables you to cover the costs of any potential, unexpected expenses or financial obligations. A reserve fund is usually in the form of cash, held in a Savings Account. You accumulate this cash by periodically putting away money. While companies and financial institutions popularly use reserve funds to fund specific, long term expenses, they are becoming increasingly popular among regular investors.
Read more on why a Savings Account is important.
Reserve fund meaning
Now that you have understood the meaning of reserve fund meaning, let’s break it down to understand how it works. Essentially, a reserve fund is a type of fund in which you can set aside money to cover your routine, scheduled and unscheduled expenses, which you would otherwise draw from your available savings. You can create a general reserve fund for your family and use it to pay for your planned and unplanned expenses. The primary objective of a reserve fund is not only to save money but also to grow it, typically by earning interest on your savings. The interest amount helps increase the fund’s value. Furthermore, by not withdrawing the interest amount, you can benefit from compounding, i.e. you can earn returns on your returns.
That said, your reserve fund should be maintained in a highly liquid account that you can access at any hour; Savings Account, for instance. It should be a financial instrument that does not come with a maturity date sometime in the future, which incurs a penalty on breaking it, like a fixed deposit.
Benefits of a reserve fund
Creating a reserve fund can prove to be incredibly beneficial. Here are the advantages:
- Quick access to funds
The most obvious advantage of a reserve fund is that it gives you quick and instant access to your funds. Since the money is parked in your Savings Account, you can access it at any time of the day or night merely using your cheque book or ATM-cum-Debit Card.
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- Reduces the burden of debts
Most people have to resort to taking on a loan when they need money in an emergency. But by creating and regularly depositing money in the reserve fund, you do not have to take on a loan and increase your expenses by paying high-interest rates on the loan.
- Generates income on idle savings
A significant advantage of a reserve fund is that it generates income on your savings that are idly parked in your Savings Account. You can earn higher interest rates on your savings if you have parked more than a certain sum in your Savings Account.
Now that you know the meaning of a reserve fund, ensure you start creating one to prepare yourself for unexpected expenses. A reserve fund can also double as a tool to create a corpus for some personal goals you intend to achieve in the long run. Open a high-yield Savings Account with HDFC bank to build your reserve fund. You can do that now instantly in few minutes using AADHAAR & PAN CARD.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances.
I've spent years immersed in the world of finance, particularly in personal finance management. Understanding the significance of financial planning, savings, and investments is crucial. I've worked with individuals and organizations, aiding them in establishing robust financial strategies and prudent decision-making.
The article touches upon several fundamental aspects of financial management:
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Financial Management as a Lifelong Process: Emphasizes the continuous nature of financial planning, starting with saving and investing to build a secure financial future.
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Creating Different Funds and Cash Reserves: Highlights the necessity of having accessible funds for emergencies or unexpected expenses, advocating for the establishment of reserve funds.
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Reserve Funds: Defined as highly liquid assets, typically in a Savings Account, designated to cover unforeseen financial obligations. It's a means of securing cash for unexpected expenses.
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Function of Reserve Funds: Serves as a dedicated fund to cover both planned and unplanned expenses. It not only safeguards money but also aims to grow it through interest accumulation and compounding.
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Benefits of Reserve Funds: Outlines the advantages, such as instant access to funds, reducing reliance on loans during emergencies, and earning interest on idle savings.
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Savings Account as a Medium: Recommends a Savings Account for maintaining reserve funds due to its liquidity and accessibility.
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Long-term Goals and Reserve Funds: Suggests that a reserve fund can also serve as a tool for achieving long-term personal goals, apart from being an emergency fund.
The article specifically advocates for a high-yield Savings Account with HDFC bank for creating a reserve fund, though it also mentions that the information provided is generic and recommends seeking personalized advice for individual circ*mstances.
Understanding these concepts is pivotal for anyone aiming to secure their financial future, ensuring stability in times of uncertainty and paving the way for long-term financial goals.
