The interest calculation should be based on the actual interest earned on the reserves. The Next Step Solutions Reserve Study allows interest rates from 1-10% and can combine all the different interest earnings and determine an appropriate interest rate that would match what they actually receive.
Most reserve companies simply add the interest rate to the entire reserve savings, but it can give an incorrect amount if there is more than one reserve savings account. If the income received does not match what the reserve study shows, the board does not trust the projected income in the study.
Most boards have one reserve Money Market account earning basically nothing. This provides them with liquid funds for an immediate need. They also have a second reserve account at the brokerage service that had their money in certificates of Deposit, earning much higher rates of return. These funds are designed to earn for the longer term and are generally not used for immediate needs.
For example:
The reserve Money Market account has $50,000 to allow the property manager the ability to quickly access reserve funds for emergencies. That rate of return is .2%. The interest in the account is $100 annually.
The brokerage account has $280,000 in certificates of deposit, (CD’s) earning 1.97%. The interest on the account is $5,516.
Combined, these accounts earn $5,616 on $340,160 in asset. That works out to about 1.65%.
Therefore, the interest used in the reserve study would be 1.65% on $340,160 beginning reserves thus providing a true projected interest for the study and believable for the board.