Buzz
Thinking about our healthcare system stresses me out so much that I reach for the inhaler I can barely afford. Even though I’m fortunate to have a job and be (mostly) healthy, planning for medical costs is still overwhelming. Unplanned health expenses can wreak havoc on your finances if you’re not ready. Building a solid savings buffer for healthcare can ease your mind and help you avoid debt. But aside from what’s deducted from your paycheck (or paid out of pocket), how much should you realistically budget for medical costs? The figures differ greatly based on your insurance coverage and personal health, but let’s break down how to estimate a reasonable healthcare budget.
Key Health Insurance Terms You Should Understand
Let’s start by quickly going over the definitions of a few important health insurance terms you should understand.
Deductible. This is the amount you are responsible for paying out of pocket before your insurance begins to share the costs. For example, if your deductible is $1,500, you’ll need to cover this amount yourself before your insurance kicks in to handle the rest. Certain services, such as preventive care visits, might be covered before meeting your deductible, so it's essential to thoroughly examine your plan's details.
Premium. The premium is the amount you pay to your insurance provider to keep your plan active. You can pay this monthly, quarterly, or annually, depending on your agreement. If your premium is deducted from your paycheck, it is typically done on a pre-tax basis, with your employer often contributing a portion. If you purchased your plan through the ACA marketplace, you may be eligible for tax credits to reduce your premium costs.
Out-of-pocket limit. This is the maximum amount you'll need to pay for covered health services during a year before your insurance covers the remaining eligible expenses at 100%. Your deductible, copays, and coinsurance counts towards this limit, but your premium is not included in this total.
In-network vs. out-of-network providers. You may encounter both “in-network” and “out-of-network” providers when scheduling healthcare services. In-network providers have an agreement with your insurance to offer discounted services. Out-of-network providers may not be covered or may be covered at a reduced rate depending on your plan. You should also expect higher costs, including a higher deductible, copay, and coinsurance when seeing an out-of-network provider.
Understanding these basic terms can give you a strong starting point in navigating the often complex world of healthcare budgeting, even if you're just beginning to learn about it.
How to Budget for Healthcare
If you're one of the lucky ones who receives health insurance through your employer, you probably already know that your premium is automatically deducted from your paycheck. However, for those paying for their own insurance, figuring out how to account for additional out-of-pocket expenses can still be confusing. So how should you approach budgeting for healthcare expenses that aren't automatically deducted from your paycheck? Below are steps to help you plan for healthcare costs:
Start by estimating your total out-of-pocket healthcare expenses for the year. This includes copays, deductibles, prescriptions, dental and vision care, and any other medical services. Look at your expenses from last year as a guide.
Next, divide your annual healthcare costs by the number of pay periods in the year to determine how much to set aside each paycheck. For example, if your annual costs are $2,400 and you’re paid bi-weekly (26 pay periods), you’d need to budget $92.31 per paycheck ($2,400 / 26).
When preparing your healthcare budget, make sure to include any anticipated changes, such as reaching your deductible, filling new prescriptions, or planning for major treatments like braces or glasses. It’s a good idea to also build in a buffer for any unexpected expenses.
Lastly, make sure to review and adjust your contributions at least quarterly, or as your expenses change throughout the year, to stay on top of your healthcare costs.
Katie Tassin of Money With Katie suggests a simple approach: Take your annual out-of-pocket maximum for in-network doctors and divide it by 12. This gives you the monthly amount you should allocate towards healthcare savings.
The essential step is to estimate your total annual healthcare costs, divide that by the number of pay periods, and contribute that consistent amount to build up savings for your medical expenses. Don't forget to revisit and adjust this as necessary.
Other factors to consider
Healthcare-related matters are never simple, and it often feels like everything is out of your hands. It can be overwhelming, but here are some strategies to help you prepare and bring some peace of mind.
Consider building an emergency fund cushion. You can't predict unexpected injuries or illnesses, so include a buffer in your estimate. Aim to save an extra 20% beyond your expected healthcare expenses to cover unforeseen emergencies.
Think about contributing to a specialized healthcare savings account. An HSA lets you contribute pre-tax money that can be spent tax-free on qualified medical expenses. HSAs work well with high-deductible health plans to cover those out-of-pocket costs.
Automate your savings. Set up automatic transfers from your paycheck to your HSA, if available, or to a dedicated savings account for health-related expenses. Making regular contributions will help grow your savings faster.
Review and adjust annually. During open enrollment, reassess your healthcare expenses and modify your contributions accordingly. As life and health circumstances evolve, so should your savings plan.
