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.
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.