The following is a guest post by Akash Sky. Akash writes articles that teach people about investing using intuitive graphics and simple, plain English over at akashsky.com. Enjoy!
I’m sure you have all heard of emergency funds, and I’m sure that many of you have them as well. But, have you heard of an opportunity fund? It’s similar to an emergency fund, except the purpose behind its use is different. In this article, we will discuss following:
- what an opportunity fund’s purpose is
- how large an opportunity fund should be
- who stands to benefit most from an opportunity fund
- where an opportunity fund should be stored
- how an opportunity fund should be used
Alright, let’s start by discussing the purpose an opportunity fund.
What’s the purpose of an opportunity fund?
To better understand the purpose of an opportunity fund, let’s examine the purpose of an emergency fund. According to Investopedia, the purpose of an emergency fund is to improve financial security. In other words, the emergency fund is there to limit your downside potential (i.e. bad things like debt, homelessness, hunger, etc.). Now, take that purpose and reverse it.
The purpose of an opportunity fund is to maximize your upside potential. Basically, an opportunity fund’s purpose is to give you the financial fuel to make the most of an opportunity that comes across your way.
What type of person benefits most from an opportunity fund?
First off, I want to explicitly state that an opportunity fund is not for everyone. If you are simply looking to remove risk from your life and remain financially comfortable, an emergency fund is more than enough for you.
A person well-suited for an opportunity fund would have the following attributes:
- Is actively looking to increase their wealth / net-worth, even at the cost of accepting risk
- Can lock away / save additional money without negatively impacting their life
How much money should I set aside for an opportunity fund?
There are no hard rules for the amount of cash you need to have in your opportunity fund – you just need enough to make the most of an opportunity that is likely to come your way. In order to do that, you are going to have to do some introspection. You should try and answer the following question: what are some of the best opportunities that I have come across in the last 5 years?
Then. ask yourself: “How much capital / money would I have needed to take advantage of those opportunities?”. Of course, its hard to give an exact figure. For example, if you happen upon a killer real estate deal, your “opportunity fund” would need to be large enough for a down-payment, whereas if you come across a smaller opportunity like a correction in the stock market, you would only need a few thousand dollars.
In my case, I’ve got $5,000 in my opportunity fund. The opportunities that I’m expecting to capitalize on at the moment are corrections in the stock market, my personal blog, and small business ventures. In order to find out the dollar amount you need in an opportunity fund, you need to clearly define the opportunities that you want to take advantage of. Once you’ve done that, all you need to do is calculate the financial fuel you would need to make the most of those opportunities and then save that amount in the form of an opportunity fund.
Where should I place my opportunity fund?
Just like an emergency fund, an opportunity fund needs to be liquid. That means that you can’t store your opportunity fund in an investment that is difficult to convert to cash.
This means that savings accounts, CDs (if you are willing to take a slight penalty), and money market accounts are great places to store your opportunity fund. However, the best place (in my opinion) to store an opportunity fund is inside of a 1 year old I-Bond.
I-Bonds are a hybrid between CDs and savings accounts. After you lock away your money for 1 year, you are free to access it at any time. In addition, I-bonds carry less risk than savings accounts because they are immune to inflation and interest rates. To top it off, I-bonds often pay higher rates.
How should I use an opportunity fund?
Before we talk about how to use an opportunity fund, lets quickly talk about how to NOT use an opportunity fund. An opportunity fund is NOT extra spending money for when things go on sale. If you truly want to make the most of an opportunity fund, you need to spend it on opportunities that will provide long term benefit to you.
In order to properly use an opportunity fund, you need to be able to identify worthwhile opportunities when you come across them. In order to do so, you should ask yourself the following questions:
- Is this opportunity likely to benefit me far into the future?
- When is next time I can reasonably expect something like this opportunity to pop up again?
If you are not likely to come across the opportunity again and it is likely to benefit you far into the future, it may be a worthwhile endeavor to use your opportunity funds on. Ultimately, deciding if the opportunity is right for you is a personal choice. However, having an opportunity fund allows you to have a choice to begin with. It’s up to you whether or not to use your financial fuel to take up an opportunity to change your life for the better.
In the end, whether or not an opportunity fund is a good fit for you depends on your financial goals. If you want to actively grow your net-worth instead of cruise along, I highly recommend starting an opportunity fund. In the investment world, cash is king, and you’ll always need to have some of it on hand to pounce on any wonderful opportunity that comes your way. After all, fortune favors the bold, and it is much easier to be bold with an opportunity fund.
How about you all? What do you think about opportunity funds, and are they right for you?
Share your experiences by commenting below!