Do you round your reserve number up, or keep it exact?

Question

My calculated reserve number came out to something like $287 a month. Rounded it up to $300 without thinking twice, felt like a reasonable buffer.

Then I did the same thing on my next property. And the one after that. Three properties, three "small" roundups, and suddenly I'm setting aside almost $50 more a month than the actual math says I need, just from rounding habits I never questioned.

Not necessarily a bad thing, a little padding isn't the worst instinct. But I hadn't actually decided to build in a buffer, I'd just been doing it by accident every time a number didn't feel "clean." Made me wonder how much of what people call their reserve is the real number versus an unexamined round-up stacked on top of it.

Do you keep your number exact, or do you round up as a habit? And if you round, is it intentional padding or just a reflex?

Richard F. · Answer

There is no such thing as an "exact" reserve number. The best you can do is make an educated guess based on known or estimated age, observed physical condition and quality of item/product, statistical "useful life" of each element, and the local environment.

The goal is to have an amount that is close enough to the actual final expense available and earmarked for that expense, that it will be, at worst, a minor inconvenience, at best, you may have leftover funds to either re-allocate to other items on the "short" list, or to get a jump on rebuilding a reserve for that same element based on starting at age 0.

Don't forget to account for increased cost due to inflation each year. If you "know" an element is approaching end of life, you may want to get an updated current cost estimate to be sure you are in the ballpark. For this reason you must conduct a visual inspection yearly!