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Do You Have An Opportunity Fund?

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As a personal finance blogger, I often write about the importance of an emergency fund but today I want to introduce an idea I call an opportunity fund. The point of an opportunity fund is to have a cash reserve on standby in case you see in opportunity that you don’t want to miss. You fund it with savings, after you’re funded your emergency fund and paid off your debts,

Why A Separate Fund?
One good question to ask is why should you have a separate opportunity fund? Why not just dip into your savings? It’s all about discipline and planning. Much like an emergency, you have no idea when an opportunity is going to present itself. When it does, you’ll want to have the funds around so you can take advantage. If you don’t have a fund, you’ll be scrambling to scrape up the funds and you’re much more liable to make a costly mistake.

For example, let’s say you hear that I am teaming up with Warren Buffett and Bill Gates to start an investment club and we’re looking for $5,000 investments from a hundred people to get started. If you have $5,000 in your opportunity fund, you’re set and you can wire it over to me. :) If you don’t but really want to get in, you might do something as foolish as put $5,000 on your credit card or liquidate some of your existing assets just so you can get in. Since there’s no guarantee that a Blueprint-WarrenBuffett-BillGates fund is going to turn a profit (it is the stock market after all), you might find yourself in some serious credit card debt! As Confucius once said: “Success depends upon previous preparation, and without such preparation there is sure to be failure.”

Determine How Much
Much like an emergency fund, you’ll have to determine how much you’ll want to save into your opportunity fund. Since these amounts will be put towards an investment of some kind, you’ll only want to put as much as you’re willing to lose in case the investment goes sour. In the investment club example above, if you are willing to go after an opportunity for at most $5,000, then the answer is simple: put $5,000 into your opportunity fund. If you can’t stand the thought of losing $5,000 and can only handle losing $2,000 or $500 then put that amount into your opportunity fund.

You’ll want to make this decision now, now when the opportunity presents itself. Right now you’re balanced, you’re calm, and you’re rational. When you hear that opportunity of a lifetime, you’re likely not going to be any of those three so having a set dollar amount you can lose, decided when you were calm, is going to be valuable as well. Let’s say you decided that $2,000 is how much you were putting into your fund and the investment club demands $5,000 – don’t join. As appealing as the club may sound, it’s out of your price range so just let it go and seek out the next one.

Waiting Game
What should you do with the funds while you wait? Should you put it in a high yield savings account or invest it in the stock market? I recommend that you put the funds in a high yield savings account and let it sit there until an opportunity presents itself. Investing it in the stock market, while appealing from a historical average yield perspective, is an opportunity in and of itself and one that carries risk. Like an emergency fund, you don’t want the risk, so you want to be in a holding pattern until you find the right opportunity (or it finds you). So be patient and put the funds in a place for safekeeping. (If you want to invest in the stock market, by all means do so but recognize that the stock market becomes the opportunity.)

Once you’ve established your opportunity fund, it’s time to go seek out opportunities.

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11 Responses to “Do You Have An Opportunity Fund?”

  1. Trent Hamm says:

    We use our emergency fund for this stuff – we pull out cash and just replenish the emergency fund. Because our emergency fund is pretty big compared to “normal,” this doesn’t worry us a bit.

  2. GBlogger says:

    Loved this post! Yes, we have opportunity funds, to which we separately contribute. Sometimes we have something specific in mind, such as when we were building up a bit of cash to buy a (modest) investment property. Sometimes we don’t have anything specific in mind or are waiting for the Blueprint hedge fund to open (and hope we will have enough to be let in…)

    We generally keep these funds in high-yield savings accounts, though the yields are not so high right now.

  3. Wow what a great idea! I am bad about making spur of the moment (and usually bad) decisions. I already have an emergency fund in progress and I can’t wait to start saving for an opportunity fund next. It’s good to have goals and something to push forward for. Thanks for the post!

  4. Chuck says:

    I like the disciplined approach. It occurs to me that reverse money migration is free to occur. Should you find yourself in a Financial Emergency, you could take this Opportunity to have deeper bench for the Emergency Fund.

  5. Tyler says:

    I am in the same boat as Trent.
    I have a large-ish emergency fund that I use for opportunities (such as the two condos that I purchased this year).
    I also have about 60% equity in my home that I have a revolving line of credit on so that I can make “cash” purchases of real estate and other assets when the right deal comes along.
    I’ve been meaning to write about these on my site, maybe this will actually kick-start me to get these written down.

  6. Will says:

    This is an excellent idea! I for one couldn’t use part of an emergency fund (like Trent does) because I don’t think I’d have the discipline to replenish it: once I start dipping into it for investments, then it’s a wrap, I won’t see it as an emergency fund any more, but as a potential source for investments!

    For me, keeping things separate would be best :)

  7. Very interesting Idea – I’m digging it. While our Emergency Fund isn’t topped up as yet, I’m liking the words of Trent and Tyler in having “extra” in there to use as wished.

    I’ll just keep our true EF at an even number (like $10,000) so I know all extra can be used for opportunities and such. That’s what i call sexy!

  8. Sacha Chua says:

    I’m building up a nice little opportunity fund separate from my retirement savings and my emergency fund. I call it my crazy idea kitty. I regularly save around 40% of my paycheck in this crazy idea kitty, and I dip into it for opportunities that come up. Anything I get from opportunities goes back into the fund. =) It’s great stuff!

  9. Bella says:

    A friend of mind set up a fund called “Surprise fund”. Interestingly, my idea was a fund for positive surprises whereas in her mind, it was more “negative surprises”. Anyway, I find that Surprise fund, in the positive way, is a great way to call the opportunity fund

  10. Rebecca says:

    Just read this post, literally two minutes ago.
    Logged onto my ING account.
    Created an Opportunity Fund with the interest accrued from my Emergency Fund. Painless.

  11. Shanti says:

    What a fantastic idea! I am out of debt – after years of sacrifice and struggle (never mind my whining… I got myself into debt, didn’t I?), I’m in the process of saving a big contingency fund. After that’s complete, it’s time to build wealth rapidly and reach the F-U money stage in about a dozen years – perhaps retire early. I think that this is a very cool idea, though… perhaps after saving an emergency fund, I’ll save an opportunity fund and THEN begin to finance my massive goal of a lot of wealth to do whatever I want with (again, probably retire at 35). Thank you for this neato idea :D


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