When a condominium board decides to hold large amounts of cash for potential short-term emergencies, they are inadvertently sacrificing potential investment income. While maintaining liquidity is important, holding too much cash can come with hidden costs.
Property managers often set aside a portion of the reserve fund in cash to ensure quick access in case of unforeseen expenses. However, reserve fund studies typically assume that the entire fund is fully invested each year, meaning the portion kept in cash is unaccounted for in financial projections. While this practice is common, it can lead to unintended financial consequences. If you’re unfamiliar with reserve funds, read A Strong Foundation: The Crucial Role of the Reserve Fund before continuing.
The amount of cash a board sets aside is often arbitrary—there is no precise way to predict how much will be needed and when. This uncertainty leads many boards to hold excessive amounts of cash, leaving large sums dormant instead of investing for growth.
By doing so, they may be neglecting necessary long-term repairs—such as elevator replacements, roof repairs, or parking lot resurfacing—while waiting for emergencies that may never happen. While financial prudence is important, saving too much cash can inadvertently create financial strain in the future.
Inflation and the Erosion of Cash Reserves
Some boards believe their uninvested funds serve a dual purpose—covering unexpected expenses and funding future repairs. Another common misconception is that once reserve funds are invested, they cannot be accessed in an emergency. This belief can lead boards to keep excessive amounts of cash on hand, missing out on potential investment growth.
However, one thing needs to be set straight: if your money is invested—even if all of it is invested—it can always be made available. The real question is not whether money is available, but how it is invested.
Redeemable investments (such as certain GICs) allow early withdrawals without forfeiting interest.
Non-redeemable investments may result in penalties or lost interest if accessed before maturity.
Because money can be withdrawn when needed, it may be more effective for boards to invest in a way that allows funds to mature over time while maintaining accessibility. A well-structured investment strategy can ensure that funds are available for both expected maintenance costs and unexpected emergencies, reducing the risk of financial shortfalls or sudden increases in owner contributions.
Additionally, inflation and the rising costs of labour and materials continue to outpace the growth of uninvested cash. What seems like a sufficient sum today may fall short in the future, leading to funding gaps when major projects—such as roof repairs, elevator replacements, or structural upgrades—become necessary. Without proper investment, reserve funds risk losing purchasing power, making it more difficult for boards to meet their financial obligations without increasing fees or imposing special assessments.
By carefully balancing liquidity, investment growth, and inflationary impact, condominium boards can take a more proactive approach to reserve fund management. Keeping too much cash on the sidelines may feel like a safe choice, but failing to account for inflation and rising costs could leave boards unprepared for the financial realities of the future.
Finding the Right Balance
Few things are more vulnerable to change than the value of money. What seems like a large sum today may not be enough tomorrow. If condominium boards want to ensure their reserve fund keeps pace with rising costs, they should carefully evaluate their cash-holding strategy.
Disclaimer
This article is for educational and informational purposes only and should not be considered investment advice. Before making any investment decisions, consult with a financial advisor to determine the best strategy for your specific needs.
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