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?
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:
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.