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How to budget for healthcare

If you spend time researching how to create a budget, you’ll find that most of the advice given includes saving for things like housing, child care, home repair, and vacations—but usually not healthcare.

In fact, in their popular "How to Build a Budget" post, NerdWallet includes insurance and child care as part of your "needs" section, and mentions saving for an "emergency fund," but doesn't specify the types of healthcare expenses you might need to consider beyond insurance. Insurance and saving for medical services you might need in retirement are both important, but not the only things you should be planning for when it comes to healthcare costs.

This article is the first in our series on practical tips for healthcare budgeting. Below, find an overview of the types of healthcare expenses everyone should be budgeting for, as well as some basic tactics for budgeting.

Over the next few months, we’ll be going deeper into each of these topics, so subscribe to our newsletter to stay updated.

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how to budget for healthcare

Which healthcare expenses should you budget for?

To figure out your estimated annual healthcare costs and medical expenses, you need to do a few things: get intimate with your health insurance (if you have coverage), figure out what your anticipated “routine costs” will be, and plan for emergencies.

Your health insurance

Personal finance expert Laura D. Adams, host of the popular "Money Girl Podcast," says that the first step to budgeting for healthcare is to really understand what your insurance is going to cover.

“Insurance coverage is so basic, but there are a lot of people who don’t really understand how it works because they’ve never had to use their plan before. If you’re paying for a policy, get to know what you’re actually paying for,” Adams explains.

So, if you have health insurance, check out the specifics of your plan—if you don’t already have a copy of exactly what your plan covers, get one from your employer or insurance company. This will help you estimate what you need to plan for as closely as possible. The following are all expenses that should be taken into consideration when adding insurance-related healthcare costs to your budget:

  • Monthly insurance premium. Your monthly insurance premium—the amount you pay to maintain health insurance each month—is the most obvious expense to budget for. If you have health insurance through your employer, they may cover this for you. Be sure to ask! If you have a private insurance plan, are covered through the Healthcare Marketplace, or your employer does not pay your premium, you’ll want to specifically set aside enough money each month to fully cover this recurring expense.

  • Your deductible. This is the amount you must pay in a given year for covered healthcare services before your insurance kicks in (although even then, you’ll still have to pay your fixed co-pay and co-insurance for certain types of visits). Your deductible is likely one of the largest healthcare expenses you’ll have, especially if you’re on a high-deductible insurance plan. Deductibles can vary greatly—some are as low as $250, while others can be upwards of $2,000. Find out what your deductible is, and use that as a baseline for what you need to budget for.

  • Co-pay. A co-pay is a fixed dollar amount that you pay for services or prescriptions, and it counts towards your deductible. This is a smaller routine cost, but it can add up. For example, if you estimate that your co-pay for a prescription is $20, and you need to get that prescription filled 5 times in a given year, you can estimate that you’ll be paying $100 for that prescription annually. Check with your insurance company to find out what your exact co-pay amount is for different types of services, then build your budget accordingly.

  • Out-of-pocket max. Your out-of-pocket max is the most you’ll have to pay in a given year for healthcare before your insurance covers 100% (that includes co-pays and co-insurance). This will likely be a significantly larger number than your deductible. Laura Adams says, “The out-of-pocket maximum is kind of like the worst case scenario—understanding what that maximum could be in the event the you have a serious accident or illness is important.” If you can afford to set aside your out-of-pocket max (instead of your deductible) each year to cover any healthcare costs that might come up, you’ll be in great shape.

  • Co-insurance. Co-insurance is a fixed percentage you have to pay for medical services, like a hospital visit, even after your deductible has been met. It can be trickier to budget for this—but if you’re budgeting for your out-of-pocket max as your baseline, you don’t need to worry too much about this expense.

Routine healthcare costs

Health insurance is technically a routine cost, if you’re paying monthly for a premium, anticipated office visits, and prescription drugs. But other routine medical costs need to be taken into consideration. Examples include over-the-counter drugs like allergy medicine, new eyeglasses or contact lenses, hearing aids, or other medical equipment that you need to use on a routine basis.

These may seem like small expenses, but they add up.

Emergency medical costs

Finally, you need to budget for an emergency. Laura Adams explains further: “Coming down with an illness, getting hurt in an accident, or needing advice from a specialist are the types of unpredictable and variable expenses that you simply can’t avoid. Have an emergency fund of at least 3-6 months’ worth of living expenses on hand in these situations.”

If 3-6 months’ worth of living expenses on hand seems unreasonable, your out-of-pocket maximum amount is a good goal for your emergency fund. If that's still too much, at the very least save the amount of your deductible each year to cover that expense.

How to build your annual healthcare budget

Now that you know what to budget for, let’s look at how to budget for it. There are many different options for managing the cost of your healthcare.

Just like you’d budget for rent, food, clothes, or a vacation, figure out how much each month you need to save to contribute to the healthcare costs outlined above: your premium and other routine costs, along with what you need to set aside for an emergency fund for unexpected costs.

Laura Adams’ provides some great advice:

“Setting aside a minimum of 5% of your net income for fixed and variable healthcare costs is a smart plan. But to really understand what your future costs may be, look to the past. Review your expenses over the past year (or several years if you have the data available) and add up what you spent on all types of healthcare.

Then consider how your needs could change. Are you ready to start a family? Do you have nagging health issues that you’ve put off and finally want to address? Are you planning to leave your employer and work for yourself?

Take your average annual healthcare cost, plus any additional expenses you anticipate, and divide by 12 for an amount to budget per month. If it seems high, you may need to cut back in other areas or consider how you could earn additional income to make sure you won’t overspend.”

Here’s an example for an individual with no dependents:

  • Monthly premium: $100 — $1,200/year
  • Out-of-pocket max of $6,000 for emergencies — $6,000/year
  • Routine costs for prescriptions: $50/month — $600/year

= $7,800 annual budget for healthcare costs or $650/month.

Keep in mind: if you are able to put aside enough money to cover your out-of-pocket max, you should be in very good shape. Chances are, your healthcare expenses will be below your out-of-pocket max—so next year, you can replace only what you spent.

The type of healthcare savings account you need

There are several different savings accounts available specifically for healthcare costs. Do some research to see which you qualify for and which makes the most sense for you. The ones you can look into are:

  • Flexible Spending Account (FSA). This is only available to people who have have health coverage through their employer. If that’s you, then ask your HR/benefits manager if an FSA is available. An FSA account will allow you to save your pre-tax income to put towards healthcare expenses, and some employers match contributions.

  • Health Savings Account (HSA). These are available to people who have high-deductible health plans—either through employers or a financial institutions. (So anyone can open an HSA account, so long as you have a high-deductible plan.) You can contribute money pre-tax and your contributions roll over each year, which makes it a desirable option for people who qualify.

  • Health Reimbursement Arrangement (HRA). An HRA is an employer-funded account that allows your employer to reimburse you for eligible out-of-pocket medical expenses and your health insurance premium. This is a great option, so check with your employer about this benefit.

  • Regular savings account. If none of the options above are available to you, consider opening a regular savings account with your bank or another institution. According to Laura Adams, look for accounts that are “high-yield” so that you get better rates. “You might want to consider opening up a healthcare savings account in a different institution than where your regular checking or savings account is saved,” Adams explains further. “That way, there’s more of a barrier to taking out the money for non-healthcare expenses.”

Ways to get ahead of healthcare costs

The best way to stay on top of your healthcare budget is to plan ahead. The more aware you are of health and medical costs upfront, the less likely you are to be surprised with high medical bills. Here’s a round-up of some tactics to consider:

  • Tools like Mint.com can help you manage your monthly budget and keep track of how much you spend on routine costs.

  • If you get insurance through your employer, talking to them directly can give you insight into any special benefits your plan offers. If you are shopping for an insurance plan, compare plans using PolicyGenius.

  • Call your insurance and doctors’ offices before any visit or treatment, so you can ask about what to expect from your medical bill. If you suspect errors on your medical bills, use Remedy to help protect your family from billing errors.

  • Under the Affordable Care Act, the majority of healthcare plans cover certain preventative services, like vaccines or screening tests. When you’re budgeting for healthcare costs, check with your insurance provider to see which services you can receive free of charge. Getting these services at the beginning of the year can help you cut down on costs later.

  • Amino can help you estimate your healthcare costs, so you can find the most affordable treatment options in your area. Try searching for a procedure or condition below, then select a doctor and click "calculate what you'll pay" to get a cost estimate customized to your insurance.

Why budgeting for healthcare is more important than ever

According to our recent survey with Ipsos, 55% of Americans say that they have received a medical bill that they did not budget for at some point in their lives. Less than half of Americans report currently budgeting more than $50 a month for health and medical expenses—and 64% of Americans want to lower their healthcare costs but don’t know how. It’s clear that you need to start thinking of healthcare as you would any other personal finance issue, and that starts with acknowledging that you need to plan for healthcare expenses.

Ultimately, how much you need to budget for healthcare is largely dependent on your individual insurance plan and your health. You can use this practical guide to help you understand what to factor into your budget monthly and annually, so you can stay in control of your personal finances.

In upcoming posts, we’ll be talking about ways you can cut medical costs like negotiating your bills, using telemedicine, and shopping around for the right care.

Research and copyediting for this article by Christina Vanvuren and Olivia Marcus.