Why you need an opportunity fund

The first step towards financial freedom is to eliminate debt. The second is to save for emergencies with an emergency fund.

But what about planned expenses? That’s where the opportunity fund comes in.

Christmas comes every year, right? By planning ahead, you won’t be raiding your emergency fund to buy presents.

An opportunity fund is a fund of readily accessible cash for anticipated purchases that are non-emergencies.

Examples include:

• taxes
• cars
• vacation
• furniture
• auto insurance
• Christmas gifts
• investment opportunities

Pretend it’s June, and you plan on spending $600 on Christmas gifts in December. You need to save $100 a month for the next six months to be able to buy all of your Christmas gifts without taking on debt.

If you pay $1,200 in car insurance once a year, you need to set aside $100 a month to cover the cost.

It’s an awesome feeling to know when the insurance, tax bill, or whatever comes due, the money is there to pay it. By having separate funds, you keep your emergency fund for real emergencies.

What is the difference between an opportunity fund and a savings account?

An opportunity fund is for a specific purchase. It holds only the funds for one thing – like a vacation.

A savings account may just have money in it for when it’s needed. It may not be assigned any task at the moment.

What is the difference between an opportunity fund and an emergency fund?

Your emergency fund contains money for unexpected expenses. You don’t know what or when something is going to happen, but it will.  A broken windshield on your car. A roof that needs replacing. For these events, you would use your emergency fund.

You know your taxes are going to be due. Your kids are going back-to-school. You may want some new furniture. None of these things are emergencies. They are things you need to prepare and save for with opportunity funds. Opportunity funds:

• have a specific purpose (new car, furniture, taxes)
• have a known savings amount ($1,000, $2,500, $5,000)
• have a date when you need the money by (6 months, 12 months, 24 months)

Where do I keep opportunity funds?

The purpose of the opportunity fund it to prevent you from having to borrow money to buy things. You’re avoiding taking out loans or using your credit cards to take on more debt.

The best place is a savings account where the cash can be quickly retrieved.

How can I track upcoming expenses?

Some people use spreadsheets to track their funds. There is an easier way. Using an online bank like Capital One 360 you can easily setup an account for each fund. Your local credit union may offer this feature too.

The great thing is it’s easy to transfer money between your main Capital One checking account and each fund. It takes just minutes to setup an account and seconds to transfer funds between accounts.

I’ve used opportunity funds in the past for home decorating, vacations, cars, and home renovations.

Is it really this simple?

Like most things with personal finance, it’s simple to explain. It’s not easy to do. Are you someone who likes to plan out every dollar? Many people aren’t.

When the time comes to buy a car instead of being patient and saving they take out a big huge auto loan.

In May, when summer vacation is creeping up, it’s easier to charge the hotel and airfare to the credit card. By planning ahead, you will stay out of credit card debt. You won’t have to worry about buying $15 margaritas at the swim-up-pool because you will have set aside the money already in an opportunity fund.

Margaritas taste better when you don’t have to worry about how you’re going to pay for them at the end of your vacation.

Carve out some of your income to go into your different opportunity funds. When it comes time to make your purchase, you will have the funds available and won’t have to worry about the impact on your finances.

What are you trying to save for? Please leave a comment on Facebook or Twitter.