Personal Finance 101

Where’s Your Opportunity Fund?

Monday, May 5th, 2008

The “opportunity fund” is a concept that I have used for many years now and, only recently, did I discover the name for it. Jim at Blueprint for Financial Prosperity coined this term over at his site and it struck a chord with me.

What Is An Opportunity Fund?

An opportunity fund is simply a stash of money that I set aside for investment opportunities that are almost certain to be profitable, but come about unexpectedly. They also usually require that the cash be accessible in a short period of time.

Jim outlines the opportunity fund as akin to the emergency fund, which I have talked about as well. Many folks like to keep their emergency fund and “opportunity money” separate. This is probably the ideal situation for most. However, over the past several months, I have been raising cash awaiting investment opportunities. I have also sold a condo in March for a nice profit and needed to store the cash until another opportunity came along.

Instead of opening an additional account for this opportunity money, I simply added it to my ING Orange Savings Account where it earns higher interest as part of my emergency fund.

How Much Opportunity Money Should I Have?

That depends.

The amount of money in your opportunity fund should not be a significant portion of your net worth and it certainly shouldn’t be more than your emergency fund! My rule of thumb is that I like to have about 1-2 months of net salary in an accessible account for opportune investments.

For instance; after I sold a condo in March I kept the profits available and liquid while searching for another opportunity.

Normally, I would have invested the majority of those funds in dividend paying stocks. However, I didn’t like the way the market was performing at the time and I am overly invested in the stock market as a whole.

Why Not Use A Line Of Credit

While I do have a large line of credit on my home that I use for quick purchases of undervalued real estate, I don’t advocate that the average person do so. My home equity line of credit is used in the same fashion that my opportunity money is, but it takes on a lot of risk. I only use this type of financial leverage when I have done some serious homework and the asset is very undervalued.

My most recent purchase as an example:

I just purchased a 2BR condo in a growing community for $89,000. Comparable units have recently sold for between $104,000 and $124,000. As you can see the asset is at least 15% undervalued.
(More on this in a future article)

Using financial leverage like a line of credit or mortgage can be an excellent tool to building wealth, but it can also make you poor in a hurry if things go wrong. I have written an excellent example on this subject in the past and I strongly suggest that you read it if you have not already.

Here is the link to the article:

http://dividendmoney.com/understanding-mortgages/

For Assets Only

Opportunity fund money and money borrowed (credit) should only be used to purchase assets. That is, if the object purchased does not appreciate in value or put cash flow in your pocket, then it should not be purchased using a line of credit or opportunity money.

This is where the average person is steered wrong by the pressures of consumerism in our society. Many folks see money in their account as “extra” money that can be spent on anything. It is up to use to develop our own financial will power to make sure that we are investing our “extra” money for a more prosperous future.

How do you fund opportunity investments?

Posted in Investment News | 1 Comment »

Emergency Fund Cash: How Much Is Enough?

Monday, April 21st, 2008

As many regular readers know, I have just become a father for the first time. When my wife and I first found out about the pregnancy, the “financial manager” in me quickly listed the following things off in my head as financial “to do” items:

• Update estate plan and will
• Increase life insurance policies
• Start education savings plan for child
• Increase monthly expense budget
• Increase emergency cash fund

Where To Start?

The biggest thing on my list of to-do items was to increase the amount of money that we saved in our ING Orange Savings Account cash reserve fund each month.

The reason that this was the most important thing was because the money in a high yield savings account could be easily re-directed where it was needed most. There were several larger items that we had to purchase. We tried to purchase the majority of the required items second hand (except for a car seat for safety reasons).

In addition to physical items for the baby’s care; we also had to do some minor renovations to our house such as painting the nursery room, decorating and updating the air exchange system. All of these require cash!

New Financial Territory

While I am OK with the increased spending due to the addition of another member to our family, it is very unfamiliar territory to me financially. Because it is such new territory for our family, we are going to begin tracking our monthly expenses even more closely(using Quicken) until we can determine the actual additional requirement. Prior to that, we have decided on a relatively arbitrary amount to add to our cash reserve.

We decided to add an additional 5% of our net income to our emergency fund due the arrival of the baby. This figure was arrived at by using a rough estimation of the added cost of the baby’s essentials to our own essentials. Of course everyone has a different interpretation of “essentials”, but I am still wondering if this amount is enough?

I will certainly find out how close my estimates have been after a couple of months of tracking the expenses in our new catgories…What do you think of my estimates?

Posted in Saving Money | 9 Comments »