When do you stop building sinking funds?

[Narawen]

I'm doing a modified version of the Dave Ramsey baby steps (more closely following his predecessor, Crown Financial's Money Map), where I've been building sinking funds, the emergency fund, and paying off debt at the same time. I'm single without kids, have only student loan debt (which should be paid off within a month), 6 month's worth of expenses in my emergency fund, and keep a one month cushion in my checking account. I contribute to my 401k enough to get my employer's full match, but no more. 

I consider my "emergency fund" primarily as money set aside in case of a job loss (unlikely where I am now, but I'm a bit paranoid about it) and as a living expenses fund for when I pursue graduate school in a year or two. Although I could use it for other emergencies, I keep sinking funds for other sub-categories that may constitute an emergency.

My two biggest concerns are unexpected car expenses, and medical expenses. I have health insurance through work, but since I'm young and relatively healthy, I have the plan that has no month-to-month expense for me, but has a HUGE deductible if something did happen to me (I think it's $5,000, before the insurance kicks in a single penny). My car is two years old and shouldn't have any major repairs coming up soon, so I use the car fund for regular oil changes, etc. My insurance deductible is $500, though I may raise it to $1,000 to save some money there. 

In this situation, do you add to sinking funds in perpetuity (perhaps reducing the monthly amount over time as the value of the fund grows), or do you have a cut-off balance for your funds? Should I just keep adding to my medical fund until it reaches my deductible amount, though that will take years and years? My car fund right now is just over $500, so if any accidents happened, I could pay the deductible. When do cars start requiring really expensive maintenance? I want to move on to other savings goals once my emergency fund reaches 12 months, but all the "what if"s keep popping into my mind and I want to keep adding to these sinking funds to have various levels of emergency coverage. WWYD?

[laohaire]

I am big on sinking funds, so I've given the question of when enough is enough a lot of thought.

For larger things - like a $5k deductible, or perhaps home repair in which you might consider a huge expense like a new roof - I have concluded that, unless you have a pile of money, you do have to draw the line somewhere.

Our family has a $1k individual medical deductible, but in theory we could all need serious medical attention in the same year, which is a $2.5k deductible cap (plus, no doubt, other out-of-pocket expenses). I've settled for having $1k set aside for now. This covers the most likely events. Later, when we have paid down more debt, we will add to it. But I don't want to wait for that much longer to save up yet another $1.5k for this category. If it comes to pass, we'll figure it out.

If it were just $1.5k then I'd say we should do it, but it's anything - like I mentioned above, we could need a new roof, for example. But if I spend all the time necessary to save up for every foreseeable expense, I will have a very nice and large savings account earning less than 1% and the same debt with the same minimum payments.

Where is the line for you? I can't say. But my bottom line is to give you permission to make your own reasonable limits so you can keep progressing. When you have achieved more goals and have more leeway, then of course you will increase your sinking funds before you go buy a yacht with the rest :)

[laohaire]

Forgot to mention, that while I agree an emergency fund is separate from a sinking fund, I would say that a medical event that required $5k deductible suffices as an emergency. It's not, as DR says, a sofa on sale. So you can mentally allow yourself to fall back on the emergency fund for such items. If you have $2k in sinking funds and another $10k in emergency funds, for example, you're in great shape, you'll be totally covered for such a medical emergency, and you can move on to your next tasks. (The 2k/10k is just an example, don't take those as hard numbers, you might feel comfortable with less or more).

[Narawen]

Originally Posted by laohaire 

Forgot to mention, that while I agree an emergency fund is separate from a sinking fund, I would say that a medical event that required $5k deductible suffices as an emergency. It's not, as DR says, a sofa on sale. So you can mentally allow yourself to fall back on the emergency fund for such items. If you have $2k in sinking funds and another $10k in emergency funds, for example, you're in great shape, you'll be totally covered for such a medical emergency, and you can move on to your next tasks. (The 2k/10k is just an example, don't take those as hard numbers, you might feel comfortable with less or more).

Thanks for the reply. I know that if a medical/car emergency happened now, I could tap the emergency fund for it, but I'm soo paranoid that everything will happen at once. I'm scared of spending $3-5k on a medical emergency, then turning around a losing my job two weeks later, with a significantly smaller emergency fund. It's unlikely that I'll lose my job any time soon unless the economy takes a MAJOR downturn, but still. I guess I'm unsure what a reasonable amount to stop at is. 

[laohaire]

Originally Posted by Narawen 

Thanks for the reply. I know that if a medical/car emergency happened now, I could tap the emergency fund for it, but I'm soo paranoid that everything will happen at once. I'm scared of spending $3-5k on a medical emergency, then turning around a losing my job two weeks later, with a significantly smaller emergency fund. It's unlikely that I'll lose my job any time soon unless the economy takes a MAJOR downturn, but still. I guess I'm unsure what a reasonable amount to stop at is. 

I think the reasonable amount is the one that lets you sleep at night. Personally, I would think the chances of a major medical wipeout and job loss and I don't know what are reasonably slim - I do know it happens though. But ultimately, the amount I have lets me sleep at night. In no way does it cover every possible scenario, but I feel like I won't get anywhere if I'm stuck piling up cash forever. I want to move on to paying off my mortgage now and feel like I have taken reasonable precautions against foreseeable emergencies.

In your shoes, I would figure out the amount that I felt comfortable with. Is it 3k for the medical deductible? The whole 5k? Then that's what it is. For the car, figure out the absolute least amount of money you would need for the worst case scenario. For me, I would accept buying a beater. Maybe that's 3k - I haven't looked into that. There should be a limit, but that limit should be one that serves the ultimate purpose of making you feel secure. The goal of making you objectively secure in every scenario is impossible, and also can be self-defeating. 

I would not just add in perpetuity.