yowza,
It has been my experience that no matter what you set the swapfile to or how much RAM you throw in 98's face, the same thing will occur. The reason is that the amount of available memory isn't exactly being reported to you correctly. When FreeMem tells you that it's down to just a couple MB, the truth is that 50MB or more has been cached by Windows to wait for the next calling.
So in other words, this caching by Windows tells the FreeMem that it's in use. However, that's not always the case. Win95, 98, and ME all have issues with cache and resource management. There's nothing you can really do to get around that except upgrade to an NT OS (Win2K or WinXP).
Also, you are correct that most will recommend you set the swap file to 1.5 times the amount of RAM. However, that standard mostly applied back in the day when systems had 16 or 32MB of RAM. Now that we're over 128MB, you can cut back a little. I'm willing to bet that you'll never use more than 256MB of your swapfile at any given time. I have 384MB of RAM with my swap set to 192MB.
Check this FAQ for more info:
faq615-2438
~cdogg
"The secret to creativity is knowing how to hide your sources."
- A. Einstein