What Are Secondary Reserves?
Secondary reserves are any type of monetary assets that can be accessed quickly should the need arise. In many cases, cash reserves of this type are invested in short-term securities that earn some interest, effectively allowing those assets to work for the investor even though they are not currently in active use. As the name implies, secondary reserves are called into use when the primary reserves have been exhausted or are not sufficient to settle some sort of immediate debt situation.
It is not unusual for secondary reserves to also be known as excess reserves. This term refers to the fact that the assets are not required for day-to-day operations of a household budget or of a company, and as such are not committed to the settlement of any particular type of debt or expense. Those extra or excess funds can be maintained as secondary reserves that can be placed into some sort of interest-bearing account or invested in an asset that can be liquidated quickly and easily if the need arises. One example of using secondary reserves to generate interest while also maintaining quick access to the funds is the purchase of Treasury bills, since those can be cashed in with relative ease.
Building some sort of secondary reserves is a good idea for just about any type of financial situation. For a household, reserves of this type can be used to deal with sudden expenses that are not accounted for within the budget. This could include drawing on the funds to manage unanticipated travel expenses that come about due to a family emergency. In like manner, a business should create secondary reserves that can be called upon if some type of disaster temporarily limits the ability of the company to engage in sales and generate revenue to cover operational expenses.
Since secondary reserves are assets that are not needed to manage day to day expenses, households as well as companies can create these reserves from what is known as surplus. The surplus is simply the money that is left over once all obligations for the month are settled. By taking a portion of that surplus and using it to purchase investments with a high level of liquidity or depositing the money into some sort of interest bearing account, it is possible to incrementally build these reserves and create a financial cushion that could come in very handy at some point in the future.
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