How much do you have set aside for emergencies?
Common financial advice says you should be holding at least 3-6 months worth of living expenses in cash, just in case an emergency comes up. This should be a target of everyone’s financial plan, to save 3-6 months worth of necessary expenses, and have those funds stored in cash, readily available if you need them.
Accepting that target savings amount can be hard, made harder still during periods such as the last decade. That seems like an awful lot of cash to be stored, especially when the markets are performing well. After all, isn’t it better to be invested in the market in the long term? Doesn’t that mean holding a large cash position is actually losing the opportunity for greater returns?
The answer to these questions is yes, and maybe.
Let’s look into that further.
Over the long term, every investment market has increased. That doesn’t mean that they increase every day, every month, or every year. But over the long term, they have gone up. Unfortunately, emergencies by their nature cannot be predicted. But neither can opportunities.
And therein lies the beauty of your emergency fund. It is liquid cash, available for use at a moment's notice. If a once-in-a-lifetime investment opportunity arises, you have funds already available that allow you to capitalize.
It has been said that fortune favours the bold. But courage alone is worthless without the resources and ability to act. It is time to reconsider how you think about your emergency fund.
Think of your cash reserves as both preparedness for emergencies and for opportunities. This ensures you are not just ready for the worst case, but also that you are actively scanning for opportunities.
What kind of opportunities exist?
Just this month, a former colleague of mine was offered an opportunity to join a startup company. This opportunity brought tremendous upside to his career, but also introduced an increased level of risk. As part owner, some months he may even have to forego his paycheck to allow the company to chase bigger and more lucrative deals. Having a fund that allows him to take advantage of the opportunity without putting his financial position at risk is the purpose of his opportunity fund.
Other opportunities exist all around us, if only we’re looking. A real estate investment opportunity to purchase into rental properties as part of an investment group. A company that the market over-reacts to bad news and their stock is temporarily under-valued. An opportunity to buy a rare and valuable art collection from an estate auction.
These opportunities exist all around us, but not every day. When they do arise though, temporarily re-purposing your emergency fund and using it as an opportunity fund is a viable option.
Keep saving, putting money into both investments and bolstering your cash reserves. And keep a weather eye on opportunities, because it isn’t about what could have been, but what could be. This is your future, and capitalizing on opportunities is a perfect way to make that future brighter.