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There are lots of funds; emergency funds, sinking funds, mutual funds. You’ve probably heard of those, but maybe you’re unfamiliar with an opportunity fund. We’ll tell you why you need an opportunity fund.
So Many Funds!
If you read personal finance sites, you’ve probably read about all sorts of funds and understand why you need them. An emergency fund is to protect your finances from unforeseen expenses like car repairs or medical expenses.
A sinking fund is money you budget each month for big but expected expenses like Christmas and paying your property taxes.
A mutual fund is a way to save for your retirement. An opportunity fund is arguably as important as these other funds and arguably, a little sexier so we can’t understand why it doesn’t get more love in the personal finance world. So we at Frugal For Less decided to give opportunity funds the attention they deserve.
What is an Opportunity Fund?
Have you ever lost out on a great opportunity because you just didn’t have the money to take advantage of it? An opportunity fund is money you set aside so that never happens again, money that you save to take advantage of well, a good opportunity!
What is an Opportunity Fund For?
While an opportunity fund’s uses are more fun and exciting than an emergency fund (there is pretty much no such thing as a “fun” emergency), the money should still be used to save you or make you money.
An opportunity fund can save you money by letting you take advantage of big sales and discounts. That said, when you buy something that’s on sale with money from your opportunity fund, it should be something you really need, not something you just want.
If you haven’t replaced your mattress for fifteen years (conventional wisdom says a mattress should be replaced every ten years), you know you’re probably overdue for a new one. Now, this isn’t an emergency because it’s not like your current mattress is infested with bedbugs and needs to be replaced immediately.
You can still sleep on the mattress, but in the morning you’re waking up with a few niggling aches and pains and maybe not feeling as well rested as you could.
So you’ve started thinking about replacing it but a good mattress (and you should get a good one since you spend eight or so hours a day laying on it and you’re going to have it for several years) is not exactly cheap.
There is a holiday weekend coming up, and mattress stores hold big sales on those weekends. Even better, a mattress store near you is moving location and discounting their mattresses even further so they don’t have to move them to the new space. Mattresses that are normally 20% off are 50% off.
Because you know that being frugal means getting the best quality you can for your money, you’ve done your research and found the perfect mattress. And it just so happens, that model is on sale at the mattress store this weekend. This is the exact situation that your opportunity fund was built for.
If you didn’t have an opportunity fund, you could continue to save and wait for the next holiday weekend mattress sale, but you will have missed out on the additional discount being offered because of the move.
There are things you can pay for over time without incurring interest but that if you pay for in a single payment, you can get a discount. There was a great spa I used to frequent when I lived in New York City that had a terrific price on really good facials.
Each facial (which last about 90 minutes, used Decleor products, and included lots of massage) was a real bargain at $50. But if you bought a package of ten facials (roughly a year’s worth), the price was $350, just $35 each!
You might argue that facials aren’t a necessity and I shouldn’t have spent any money on them. But we all have those areas of our lives that we are willing to spend money on. For some it’s the latest electronics, for some it’s a hobby, for others its food.
For me, it’s beauty. Every year I would take $350 from my opportunity fund and buy a package of facials.
Do keep in mind in scenarios like the facial example that a business can go under and you can lose money.
There have been several incidents of people buying “lifetime” gym memberships to get a discount, and when the gym goes out of business, they have no recourse to get their money back. Only pay upfront if the business is one you are familiar with and trust.
At some point, you can’t save any more money. You’ve clipped every coupon and upcycled every plastic bag. You bring your lunch from home every day and know all the hacks to save money at Amazon and Starbucks.
So if you want more money, you’re going to have to make more money. One way to make more money is to always be on the lookout for a good opportunity and to be ready to take advantage of one when you find it.
Investing is a great way to make more money because it’s a form of passive income. Your money is making you more money with no effort from you. And even those who don’t know much about investing know that the key to successful investing is to buy low and sell high.
But how do you buy low? Well, you can do a ton of research and find up and coming companies that are not yet on the radar of most investors. You can buy their stock at a low price. But if you’re new to investing or even if you know a lot, those little gems can be hard to find.
And investing is supposed to be passive which is the opposite of spending a lot of time researching companies looking for the next big thing. So when else can you get a bargain?
In the words of one of histories greatest investors, Warren Buffet, “Be fearful when others are greedy and greedy when others are fearful.”
What that means for us mere mortal investors is that when there is a bump in the economy or a correction in the market, which we’re due for and less savvy investors start to panic and sell off their stocks at bargain basement prices, you can scoop us some real bargains using your opportunity fund.
Just how good of a bargain? March 9, 2009, was more than a year into the recession and on that date, it was still about nine months away from ending (depending on whom you ask).
If you had bought a share of Select Comfort (SCSS), the company that makes Sleep Number beds, on that date you would have paid just 25 cents, that’s right, a quarter. You could have bought a few shares of that stock using nothing more than the change in your couch cushions.
If you sold that share of stock today, June 13, 2018, it would sell for $30.33. A return of 99.1757%. Generally, we can expect to make a return of 7% a year when we invest so you can see how filling your cart with bargains during a panic can really pay off.
You don’t have to search for specific bargains when other investors are selling off like their hair is on fire (although doing a little research can reveal some individual stocks you might want to buy) to make this strategy work though.
Buying individual stocks takes some due diligence, more than most buy and hold investors want to do and it’s always riskier than buying “baskets” of stocks as you do when you invest through a robo advisor like Betterment or Acorns.
All you have to do to take advantage of these great prices is to shovel a little extra money into your investment accounts when prices are falling, and people are panicking.
If you normally invest $500 a month into your investment account, in a down market, take a few hundred additional dollars from your opportunity fund and add that to your regular monthly investment.
Many years ago you started your career with another beginner. She had a more entrepreneurial spirit than you and left after a few years to start her own company. You’ve stayed in occasional contact though, and the company she started has been successful for a few years.
When you next meet up, she has a great opportunity. The business is doing so well she wants to expand it and is looking for investors. You know this is a great opportunity and will make you a bundle of money. So you write her a check from your opportunity fund.
These scenarios may not happen very often but they can happen and when they do, you want to be ready.
Okay, A Little Fun Is Allowed
While you shouldn’t use your opportunity fund for things like shoes that are on sale when you already have a closet full or a new bigger screen TV that’s on sale when your TV still works perfectly well, there are some circumstances when it might be worthwhile to spend some of your opportunity fund on things that aren’t strictly money saving or money making opportunities.
A good example of a situation where it would be permissible to spend opportunity money on a little fun might be a trip. Maybe your best friend whom lives in a different city and you don’t see very often is going on a business trip.
They have a conference in Las Vegas, and their employer is paying all of their expenses to attend. They will have to go to the conference during the day but have the evenings free and plan to stay an extra day or two and partake in some of the things Vegas has to offer.
You’re invited! You can sleep in the spare bed in your friend’s room and eat the free breakfast buffet the hotel offers. All you have to pay for is your plane ticket, the other meals and bring some spending money.
To me, this is a good opportunity and one worth spending money on. Being frugal doesn’t mean you never get to do anything fun! You should definitely not spend money from your emergency fund for this but if you have an opportunity fund, I say go for it, Vegas baby!
How Much Should Your Opportunity Fund Contain?
While an opportunity fund is well worth having, it is not nearly as important as an emergency fund. By comparison, the money in an opportunity fund is “fun” money and remember, there are no fun emergencies. The money in an emergency fund is there to protect you from disasters in whatever form they take.
Before you consider starting an opportunity fund, make sure that you have a fully funded emergency fund. There are different definitions of fully funded but the least I feel comfortable having and advising others to have is three months of basic expenses.
You should also prioritize investing before creating an opportunity fund. In the hierarchy of Most Important Things in Personal Finance, it goes;
- Debt free (high-interest debt)
- Fully funded emergency fund
- Investing 10-20% of your take-home pay
Once those things are done, you can start working towards saving for an opportunity fund. The amount of your fund will depend mostly on your goals. If you want to use your fund mostly to save money, putting a few hundred dollars in your fund a year is probably sufficient.
When your mattress becomes unbearable and the mattress store has a moving sale, you’ll have plenty.
It takes money to make money as the saying goes so if you want to use your fund to make money, your needs will be higher. A few thousand dollars a year might be a better goal for you.
Even really poorly performing stocks don’t usually sell for the clearance price of 25 cents like the stock in our example so if you want to buy enough during a downturn to really grow your portfolio, you’re going to have to have more in your opportunity fund than what you have in your couch cushions.
Where to Store Your Opportunity Fund
Where to keep your fund depends on your time horizon which is partly going to be determined by your goal, is it to save or make money? The saving money examples have a pretty short time horizon. If you need a new mattress, you might be able to wait six months but you can’t wait six years.
If you are looking for a good investment opportunity, those don’t come along every day so it could take several years to find a good one.
Conventional wisdom tells us that any money you are going to need in less than five years should be kept in a checking or savings account. So if you are going to mostly use your opportunity fund to save money, store it in one of those places.
Money that is not going to be needed for the next five years should be invested. When it sits in a checking or savings account, it’s not making any money because those accounts pay so little interest. Your money has longer to ride out the ups and downs of the market and over a longer time horizon, you can expect to make an average return of 7%.
This is especially true if you’re looking to make money with your opportunity fund. Your fund might have thousands of dollars in it, and that is too much money to leave sitting there for years earning virtually nothing.
If you want to use your fund to make money, you can put it in an investment account, but not a retirement account. Those accounts have early withdrawal penalites.
While you won’t need your opportunity fund tomorrow, you will probably need it before you’re 59 ½ which is how old you have to be to withdrawal from a retirement account without penalty.
How to Build Your Opportunity Fund
You build an opportunity fund much the same way you built your emergency fund but with a lot less urgency. We advise people to do whatever they can to get that emergency fund built up and that can mean living on a really tight budget, maybe for years.
You can take a more relaxed attitude to your opportunity fund. I fund mine with “extra” money that I get throughout the year. Things like bonuses, (Yep! Even freelancers get bonuses when they have good clients!) tax refunds, and raises.
If you’re really stacking away money for retirement, fully funded 401k and IRA, you might consider diverting some of your investment money to your opportunity fund.
Never Miss An Opportunity
Sometimes it’s better to be lucky than good and luck is how we find many opportunities. And you never know when luck is going to smile down on you so you want to be ready when she does. If you have an opportunity fund, you’ll never get that FOMO feeling again!