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What Are Restricted Funds?

Restricted funds are any type of assets or income that are set aside for a specific purpose or purposes, and cannot be used to cover any other projects or purposes.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 November 2014
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Restricted funds are any type of assets or income that are set aside for a specific purpose or purposes, and cannot be used to cover any other projects or purposes. Funds of this type are often created by donors who provide the seed money to launch the projects aimed at accomplishing specific purposes, and are thereafter funded by donations from others who see value in those projects. Restricted funds can be used to provide educational opportunities for specific sectors of the population, support charities and various other non-profit organizations, or provide ongoing care and support for a specific individual.

Educational grants and scholarships are an example of one way that restricted funds are utilized. With this application, interested donors establish the scholarships or grants and fund them with either cash donations or income generated from a trust or other financial strategy. In some cases, others may choose to donate to the programs, assuming they also want to support the efforts of the trust. Typically, an individual seeking the scholarship or grant must meet the criteria established by the founder of the program in order to receive a portion of the restricted funds.

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Charities and other types of non-profit groups also often benefit from restricted funds. Donors may make contributions and earmark them for specific purposes. For example, a donor may choose to contribute to a non-profit that is devoted to cancer awareness and research, and earmark the funds for use in creating literature related to a specific type of cancer. In like manner, individuals who belong to a religious organization may donate funds for a specific purpose, such as a building fund, or a fund to aid other members who are going through temporary financial distress.

One of the benefits of restricted funds is that a donation of this type allows the donor to support something that is of great personal importance. An individual who had to work his or her way through college may donate funds to an educational program that assists people in a certain income bracket in paying for an education. Someone who has lost a loved one to a specific disease may wish to support ongoing research into that disease. Often, the idea behind the donation is to make the world a better place for others, by addressing one specific concern or issue that the donor feels is extremely important and in need of additional funding.

Restricted funds may be used to finance a number of other types of projects, such as providing the monetary support for archeological explorations, funding higher education for children who have lost their parents, or beautifying a particular district or neighborhood in a city or town. Municipalities, businesses, educational institutions, and non-profits all can make use of funds that are set aside to cover the expenses related to a specific purpose or project. Many people prefer to make donations in the form of restricted funds, since they know in advance how those donations will be used.

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