Build An Opportunity Fund

Financial planners recommend setting aside savings of three to six months of expenses in case of unexpected emergencies such as job loss or a sudden disaster, but how about setting up two years worth of expenses for an opportunity fund?

In Richard Carlson’s book Don’t Worry, Make Money he tells a story of a man who was offered a job at a promising start-up company.  The position offered a small initial salary but plenty of stock and stock options in the company.

Because he had a large financial reserve he accepted the job without worry.  If the venture worked out, great.  If not, he figured it would at least give him valuable experience.  It turned out to be successful and he amassed a large fortune within a few years.

This man however was not the company’s first choice.  The talented person to be first offered the job unfortunately had to turn it down.

He was currently earning an excellent salary, but he was living paycheque to paycheque.

He had a large mortgage and both he and his wife drove expensive cars.  They enjoyed spending money at fine restaurants and taking luxury vacations.  They spent most of what they made.  Although the job offer was an opportunity of a lifetime, he had to decline as he thought it was too risky.

Build an Opportunity Fund

If you are completely dependent on a secure, regular salary and have no financial safety cushion, you are probably going to dismiss a lot of opportunities that may come your way.

If your livelihood isn’t dependent on your day to day efforts though, it is amazing how creative you can be and how willing you will be to experiment with new and unexpected opportunities to broaden your life.

It’s not easy and may take a few years to accomplish but it’s worth the trade off – buy a less expensive house and car, take fewer or less costly vacations, reduce luxuries – for that two years worth of income in the bank.

What do you think of this idea?  Do you think it’s possible to save two years worth of income?  Would having that money allow you to make some changes to your career and lifestyle?  Would you pursue your dreams?  Could you go back to school, look into starting a franchise or opening up a small business, or maybe take a year off to travel the world?

I think it would be a challenge but imagine the enormous peace of mind and sense of security you would have.  With an opportunity fund you’d be able to do just about anything you wanted to do.

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  1. Money Beagle on May 17, 2011 at 5:54 am

    I’ve heard this advice before. Haven’t taken it yet but this is a great reminder to do that when money is available to do so!

  2. Sustainable PF on May 17, 2011 at 6:58 am

    Two years of income is a bit much for my liking but i’ve always been intrigued by Frugal Trader’s net worth updates @ MDG and his cash holdings always pop out at me – but these appear to be both emergency and opportunity fund rolled into one. Perhaps someday we’ll get there too …

  3. The Investment Blogger on May 17, 2011 at 7:55 am

    Great post! This is a highly recommended thing to do, and is what I call a key to successful investing. I always hold an equivalent of roughly 15% in cash, that is intended for investing in non-guaranteed investments (whether they be stocks, bonds, real estate, etc). This cash amount is outside of, and excludes, my separately managed guaranteed investment portfolio. This amount is also separate from my emergency fund as it is for a different purpose.

    An opportunity fund gives you the flexibility to increase your asset base, as well as live a better life.

    Its definitely doable to create a significant “opportunity fund”. I started working full time almost 9 years ago with basically no investments & savings, and today I live a very balanced lifestyle, paid off my condo, will be moving into a new house that I’ve almost paid off, and have a large investment base…… everyone starts somewhere. The important thing is to start!

  4. Kristina on May 17, 2011 at 3:59 pm

    You can accomplish the same thing by eliminating all your debts, and having only 6 months worth of income saved – 2 years worth of expenses is probably more telling then 2 years worth of income. That’s the approach we’re following, our mortage will be paid of in 3 years (our early thirties), after that it’ll only take one of us working part-time to support our required lifestyle. This gives us the same flexibility to pursue those opportunities as two years worth of income… and it won’t run out.

  5. Boomer on May 17, 2011 at 4:29 pm

    @Kristina and Investment Blogger. I’m impressed at what you’ve both accomplished in such a short time. No doubt you will be in a great position to pursue any worthwhile opportunities that may come your way.
    @Sustainable PF and Money Beagle: This approach is certainly not for everyone and you probably have your own plans in place.

  6. Carlos on May 17, 2011 at 6:48 pm

    Great point. Admittedly I’m taking it slightly different. I’m creating an “Opportunity cash flow”. I’ve bought a few properties, and I’m close to the point where if I decide to quite my “safe” job, that would be OK, because this passive cash flow would be enough for me to get by (barely). I also have a small amount of rainy day cash flow which would get me going for a while.

    • Boomer on May 18, 2011 at 5:13 pm

      Hi Carlos: Establishing a sufficient passive income flow would definitely be an alternative plan and one I am working towards.

  7. anna on May 18, 2011 at 12:26 pm

    I think this sounds great in theory, but will definitely take some work to put into practice. It would be difficult for most of us, but not impossible. You would need a strict but manageable household budget that you can stick to, that does some creative cost cutting – you can then put that extra income towards your savings. It would be most prudent to pay down all of your debt first with that extra ‘found’ income – debt is expensive – imagine how much more you’d save if you didn’t have to pay all of those hefty interest costs each month.

    • Boomer on May 18, 2011 at 5:15 pm

      Hi Anna: You’re right. Being debt free, especially non-mortgage debt should be a priority and if you put at least part of those debt payments toward savings it wouldn’t be that painful.

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