Reserve Study

Started by CharlesO • 6 replies • 1446 views

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CharlesO (Maryland)
Posts: 17

Posted:

Does anyone know of a good reference which explains how to set up a reserve study and do all the calculations? Ours is a fledgling community and only has four items that should be included for now, but the list will grow in the future. Thanks

GlenL (Ohio)
Posts: 5,491

Posted:

Charles there are lots of books out there on how to set a RS up but you can do it in an Excel spreadsheet; you take the replacement cost of the item, times what you think inflation will be times the number of years it is expected to last, divided by the number of years and that is how much you put away each year to replace it.

Example
Pool Pump cost $2500.00 to replace in 2009 and is expected to last five years.
2010-$2500.00 + 3% inflation = $2575.00
2011-$2575.00 + 3% inflation = $2652.25
2012-$2652.25 + 3% inflation = $2731.82
2013-$2731.82 + 3% inflation = $2813.77
2014-$2813.77 + 3% inflation = $2898.19

So in 2014 when the pump needs to be replaced you should have put $2898.19 away or $579.64 per year.

Studies show that 5 out of 4 people have problems with fractions

GlenL (Ohio)
Posts: 5,491

Posted:

Charles this is a link to a book on reserve studies written by a poster here. You can find his posts using the search feature and entering GrahamO.

http://www.amazon.com/Reserve-Essentials-Graham-Oliver-Jonathan/dp/0978198603/ref=sr_1_3/190-2699192-8238509?ie=UTF8&s=books&qid=1255223193&sr=1-3

Studies show that 5 out of 4 people have problems with fractions

CharlesO (Maryland)
Posts: 17

Posted:

GlenL,Thanks for the calculation, but where would interest on your money figure into the formula? It's not much of anything these days, but hopefully someday it will make a difference. Thanks

GlenL (Ohio)
Posts: 5,491

Posted:

Charles I wouldn't count on it at least not until you have a better handle on what you project vs. what you actually need vs. what you have. Better IMO to have a little cushion because no matter how carefully you plan, you will never have it down to the penny. In the example of the pool pump, when you go to replace it in 2014 the cost is actually $3000.00 because say all the companies that manufacture pumps had to add a widget mandated by congress and they pass the cost on to the consumer.

Studies show that 5 out of 4 people have problems with fractions

KirkW1 (Texas)
Posts: 1,665

Posted:

The place where interest comes into play is when you calculate your savings. Using the earlier example you might up the amount put in to $580. So at the end of year one you take:
$580 placed into the account
14.5o interest earned (2.5%)
580 next years installment

and you now have $1774.50. You can calculate all of that out by hand, but I would suggest that you turn to a computer program to do the lifting.

This is an exercise should in fact be performed on a regular basis. You need to adjust things such as the rate of wear and tear versus the amount of money accumulated. Sometimes something lasts longer then expected and other times less.

MaryA1 (Arizona)
Posts: 7,043

Posted:

If you're going to worry about calculating interest then you should also add sales tax. Where I live the sales tax rate is 8.5% which can amount to quite a bit on a large purchase. Having said that, I don't believe reserve studies worry about interest earned or calculating sales taxes.

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