Happy 2020! A new year smells wonderful, doesn’t it? Fresh opportunities abound, and dreams are borne.
Were you compelled to build an opportunity fund after reading my prior blog post? I certainly hope so. This article tackles the “how” of building one.
At some point in the past, you’ve likely studied Maslow’s hierarchy of needs. Please visualize a pyramid as we briefly review Maslow’s hierarchy.
There are basic physiological and safety needs for survival at the base of the pyramid. Food, water, warmth, rest, and security come to mind.
Once these basic needs are met, you can move to the middle of the pyramid: belongingness and esteem. These psychological needs include intimate relationships and feelings of accomplishment.
At the top of Maslow’s pyramid are self-fulfillment needs, focused on achieving your potential.
Maintaining an emergency fund of a few thousand dollars for true emergencies is great because it satisfies basic physiological and safety needs. But once you’re mentally able to move up the hierarchy of needs to psychological needs and self-actualization, you’re ready to build an opportunity fund. Saving for the future will seem far more enjoyable.
If you have not yet started an opportunity fund, below are three simple steps to build one from scratch:
1. Start. Start small if you have to. After all, Rome wasn’t built in a day. Begin the account with $100 if that is all you can spare.
2. Steadily add cash. You already accomplished the first step. Now build on that momentum.
3. Finish. Get to a point where you feel comfortable with the amount you have saved. Pat yourself on the back for a job well done!
Let’s break apart each of these steps into greater detail.
1.START
For step one, consider using an online bank. You can set-up a recurring ACH transfer from your checking account, or your employer may allow you to direct deposit a portion of your paycheck into this account. You may prefer to set-up the account through a bank you do not normally use so it is out of sight and out-of-mind. Ally Bank, for example, is online-only and offers substantially higher interest rates on savings accounts than traditional brick and mortar banks. Or you may find it simpler to have all family accounts at a single brick and mortar bank for monitoring purposes. If you go this route, recognize that you may sacrifice extra cash since the interest rates for traditional banks are lower than most online-only banks.
2. STEADILY ADD CASH
Step two is a little more complicated. There is no magic number for the amount of opportunity fund because each person’s dreams are different. If you want to start a capital-intensive business and save enough money for travel before transitioning from employee to owner, you will obviously need a much higher dollar amount than someone actively engaged in her current profession with no interest in changing careers nor taking a sabbatical. Furthermore, homeowners should set aside more money than renters for expensive home systems and other home improvement projects.
Traditionally, advisors recommend an emergency fund equal to three to twelve months of living expenses. This is a wide range that considers historical expenses. For self-employed persons or sole income earners, you are told to err on the side of caution and amass a year’s worth of living expenses.
An opportunity fund is future-oriented. Get quotes for repairing the roof, air conditioning unit, furnace, etc. and their estimated useful lives. Research start-up business costs for your industry if you are an aspiring entrepreneur. Consider the cost of a college education to pursue the profession your heart truly desires. If extended travel is your goal, go online and use free cost of living calculators to get a general sense of living expenses in a particular area. Investigate transportation costs such as plane and train tickets or fuel costs if you plan to drive. Do your homework now, and it will save you worry down the road.
Don’t count on a loan to finance your dream. Home equity lines of credit are popular for home renovation projects, but your interest rate is heavily determined by two things: 1) the prevailing market rate and 2) your credit score. Unfortunately, the market rate is outside of your control.
My philosophy on home improvement projects applies to vehicles as well. If your car suddenly breaks down and the cost to repair is greater than it’s trade-in value, you may want the reliability of a new car. Do not assume you will finance 100% of the new car’s cost unless there is a financial incentive to do it. Set a realistic timeline for new vehicle purchases and save within the opportunity fund for future cash outflows.
Once you have decided on a particular savings target, automate it. If you participate in a 401k or 403b plan, you can check a box to increase your contributions by a certain percentage each year. Although you may not have the same option in a traditional savings account, you can set calendar reminders to review progress each quarter and increase your opportunity fund contribution. As discussed in step one, online banks may be really helpful during this step. With the click of a button, you can make quick adjustments to the contribution amounts.
3. FINISH
And finally, finish. This may be the hardest of all the steps. Jon Acuff’s book Finish argues that perfectionism is our biggest stumbling block to finishing, and I agree with Acuff. Perfectionism shows up the day after we start and stays until the end, creating one obstacle after another. One way to combat perfectionism is to make the goal fun. You have already mentally prepared yourself by repositioning from emergency to opportunity fund. Next, come up with creative ways to stay motivated and accountable to your goal. If the goal seems impossible, think about cutting it in half or postponing the target completion date. Laser-focus on this goal, and you will be well on your way to finishing.
Michael Hyatt’s book Your Best Year Ever offers additional insight into the goal-setting process. Hyatt urges us to consider our “why” behind the goal, connecting with our original motivation. Then, identify potential stumbling blocks and design a strategy to counteract them even before they become an issue. Track progress along the way and see if any modifications are merited.
Your opportunity fund goal will look different than mine, and that is OK. If you are married, be sure to discuss this with your spouse and get his or her commitment. It is alright if your spouse isn’t as passionate about financial wellbeing as you, but ensure you both are heading in the same direction. Did you ever watch Tom and Jerry as a kid? As soon as one gets ahead, the other is pushing him down. You and your spouse should strive to be the opposite of Tom and Jerry. You want to encourage and support each other when obstacles appear.
If you’re single, find an accountability partner. He or she will regularly check on your progress and ask what happened if you didn’t meet your mini-goal. Reciprocate; offer to be an accountability partner to the other person, too (it needn’t be financial). She may have a weight loss goal, or he may want to improve a relationship with a family member.
The only person separating you from your opportunity fund is you! What are you waiting for?
