Inflation compounds these challenges. Your sinking fund may grow at 2-3% annually through interest, if you stay dedicated, while actual costs rise at 10%, 15%, or higher.
The Friend-of-a-Friend Phenomenon
You never actually meet the people who do this successfully, and those who failed are hardly going to put it on social media or tell their friends about their ill-fated strategy over coffee. It’s survivorship bias: we only hear the success stories (usually second or third-hand), never the cautionary tales.
I suspect we never meet these successful self-insurers because they’re still in the accumulation phase: feeling clever about their growing balance, not yet tested by harsh reality.
A Personal Reality Check
Let me share my personal experience from the past year – a year I thought would be utterly unremarkable.
I considered myself pretty average: late 40s, fit, healthy, gainfully employed and married with teenage kids. We have two cats, one dog, five coloured pet sheep. Our home is well-maintained. My car was serviced on schedule. We have regular health check-ups. Nothing special, nothing unusual.
Then life intervened.
First, rats ate out the wiring and suspension system on my car, rendering it completely inoperable. Six weeks in the repair shop, a claim to the tune of $18,000.
Then, while out of town, a water cistern in the roof of our home failed. A small $1.20 rubber washer perished, and water came down through the walls and spread out. Wall damage throughout multiple rooms and full carpet replacement due to staining. Four weeks of repairs. The claim: $55,000.
Finally, last month a small mole on my wife’s leg led to surgery, five nights in hospital, and a health insurance claim of $28,500.
Three unrelated incidents. One year. Total claims: over $101,500.
So much for being average.
Even if I’d been religiously maintaining a sinking fund for 20 years at $5000 per year, and never used it for anything else, I’d have $100,000. This single year would have wiped me out completely – leaving me to start from zero at age 49.
The Fallacy of Self-Insurance
The median household income in New Zealand is around $108,000. My insurance claims for the year essentially equalled an entire year’s median household income before tax.
According to the Insurance Council of New Zealand:
· the average house insurance claim in 2024 was over $15,000
· the average health insurance claim requiring hospitalisation exceeded $20,000.
Additionally, the Commission for Financial Capability found that nearly 40% of New Zealanders would struggle to cover an unexpected $1000 expense.
If we can’t maintain buffers for small shocks, expecting people to maintain funds for potentially catastrophic events is unrealistic.
The Value of Employer-Sponsored Insurance
When a company pays for insurance as part of an employee’s remuneration package, it eliminates the temptation to raid the fund or skip payments. The coverage is there, consistently, without requiring ongoing willpower.
Another advantage of group schemes – they typically provide cover for pre-existing health conditions. This means employees who may have been uninsurable as individuals can access comprehensive coverage.
Why Insurance Endures
There’s a reason why insurance has been around for many millennia. It’s because pooling risk across large populations is the only mathematically sound way to protect against catastrophic but unpredictable losses.
You’re paying for certainty; for protection against the extreme tail events that can derail your financial life, and for a system that removes the behavioural challenges of self-discipline and forced saving.
My $101,500 year shows that any financial plan must include adequate insurance coverage. If your financial adviser isn’t discussing insurance protection alongside investment strategy, you’re not getting comprehensive advice.