There’s a consensus among money writers that one of the most important first steps on the road to financial freedom is establishing an emergency fund. Your emergency fund is like self-insurance to protect you from all the small, surprise disasters we each encounter in daily life.

But not every unexpected event is unwelcome. Sometimes life brings us lucky breaks — but these opportunities can still cost money. That’s why I believe it makes sense to also keep a chunk of cash in an “opportunity fund”.

The Opportunity Fund

I first learned about opportunity funds from reading about billionaires and business owners. These savvy savers often set aside money specifically to take advantage of unexpected opportunities.

I once read an interview with Mark Cuban, for example, in which he described how a person should handle a windfall. “First, I pay off all my credit card debt and evaluate paying off any other debt I have,” he said. “What I have left I put in the bank.”

Why? “Because then it’s available for when I get a good opportunity. Every five years or so there is a bubble bursting or amazing deals available because of a change in the economy.”

Jim Wang from Wallet Hacks is a strong proponent of opportunity funds. “Missing out on an opportunity is often as bad as being struck by an unexpected expense,” Wang wrote for U.S. News a couple of years ago. “In reality, both funds are important if you want to be financially responsible.”

Your emergency fund should be liquid and easy to access. It’s best to keep it in a savings account. But your opportunity fund can be (can probably should be?) more difficult to access. It’s okay to put that money into mutual funds or certificates of deposit. (Right now, mine is in mutual funds. When I see an opportunity I want to take advantage of, there’s about a week delay between selling the shares and having the cash in my checking account.)

Your opportunity fund will start small. But as your financial situation improves, you can contribute more and more to the account. In time, your opportunity fund will become large enough that you can do some truly amazing things — like take time off for a round-the-world trip with your best friend, or quit your job to start your own business, or buy that classic car you’ve always wanted.

Buying Freedom

I’ve spoken with dozens of people who have achieved financial independence. These folks have accumulated enough capital that they’re no longer compelled to work for an income (although some choose to work for other motives). Many have remarked that money hasn’t bought them happiness; rather, it’s bought them freedom. When an opportunity arises, they can afford to take advantage of the situation.

This is an important point. Financial freedom isn’t an absolute thing. It’s not like you either have it or you don’t. Financial freedom exists on a continuum.

• When you eliminate your debt, you increase your financial freedom.
• When you build emergency savings, you increase your financial freedom.
• When you boost your savings rate (whether by increasing income or decreasing expenses — or both), you increase your financial freedom.
• And so on.

As you progress along the continuum of financial freedom from “enslaved by debt” to “financially independent,” you achieve certain milestones. For instance, you eventually reach a point where you have “Screw-It Money,” a cash cushion large enough that you could quit your job, if you wanted.

Real-Life Examples

When I was in debt, I felt like I was unlucky. I watched as my friends took trips to far away places, bought shiny new gadgets, or moved into bigger homes. I wondered why I couldn’t have these things.

Many times, a friend would come to me and ask if I wanted to join him for some sort of fun — dinner out, a basketball game, a trip around the world — and I’d have to decline because I couldn’t afford it. I wasn’t able to seize the opportunities that came my way because I didn’t have the free cash to do so.

Perhaps the biggest example from own life occurred twenty years ago. My friend Sparky had worked hard to save enough money to travel the world for several months. He asked if I wanted to join him for part of the trip. Of course, I wanted to — but I couldn’t. I had no savings and was deep in debt.

Today, however, I do keep money on hand to take advantage of unexpected opportunities. Here are some real-life examples:

• When I spotted a great deal on a last-minute Alaskan cruise, I was able to book a fun (and relatively cheap) vacation.
• When I found a deeply discounted display model at the local warehouse store, I was able to purchase a top-rated television at a bargain price.
• I was recently chatting with a friend about how Kim and I want to buy a cheap used pickup. “My father might have one for sale,” he said. We’re exploring the idea. We couldn’t do that without an opportunity fund.
• Over the past few years, I’ve discovered a handful of new businesses I believe in. I want to be a part of them. Because I keep money on hand to take advantage of opportunities, I now own 0.86% of The Financial Gym — among others.

These are just a few of the many opportunities I’ve been able to enjoy because I have money ready to pay for unexpected positive events.

Be Prepared for Opportunity

It’s not just me. I’ve discovered that many folks keep an opportunity fund (even if they don’t call it an “opportunity fund”.)

Over the past five years, for instance, I’ve spoken with hundreds of people who have achieved financial independence. These folks have accumulated enough capital that they’re no longer compelled to work for an income (although some choose to work for other motives). Many have remarked that money hasn’t bought them happiness; rather, it’s bought them freedom. When an opportunity arises, they have the freedom to take advantage of the situation.

The bottom line: It’s smart to set aside money in savings so that you’re prepared for both emergencies and opportunities.