Here’s How Much You Need to Budget for Healthcare Costs

I worry so much about our healthcare system that I need to take an inhaler that I can barely afford. Although I’m lucky to be employed and (mostly) healthy, budgeting for healthcare is still a nightmare. Unexpected healthcare costs can be a devastating blow to your budget if you don’t plan for them. Having enough savings set aside for medical expenses can provide peace of mind and prevent debt. But beyond the portion that is deducted from your paycheck (or that you pay out of pocket), how much money should you budget for healthcare costs? The numbers vary greatly depending on your insurance plan and healthcare needs, but let’s look at how to calculate what a reasonable healthcare spending budget is.

Health insurance terms you need to know

First, let’s take a quick look at the definitions of some health insurance terms you need to know .

• Franchise. Your deductible is the amount you pay for medical services before your health insurance starts paying its share. For example, if your deductible is $1,500, you will have to pay that amount yourself before your insurance kicks in and starts paying the rest. However, some services, such as preventive doctor visits, may be covered before you meet your deductible, so be sure to read your plan carefully.
• Premium The premium is the amount you pay the insurance company for the privilege of using your plan. You can pay monthly, as most people do, or quarterly, or annually. If your bonus comes directly from your paycheck, it is deducted from your paycheck before taxes, and your employer likely pays a portion as well. If you purchased a plan through the ACA Marketplace, there are tax benefits available to help you offset the cost of your premium.
• Cash limit. This refers to the maximum amount you will pay during the policy period, which is usually one year, before your plan starts paying 100% of the amount allowed. This includes the cost of your deductible, copay and coinsurance, but not your premium.
• In-network/out-of-network providers. As you make appointments with different doctors and providers, you may notice that some are listed as “in-network” and others are listed as “out-of-network.” Any network provider or facility has a contract with your health insurance company to provide services. Depending on your plan, if you see an out-of-network provider, it may not be covered or only partially covered. You can expect a higher deductible and out-of-pocket limit with out-of-network providers. Your coinsurance and copay may also be higher for out-of-network providers.

If you don’t know anything else about our confusing healthcare systems, the terms above are a good starting point for determining your budgeting needs.

How to Budget for Healthcare

If you’re lucky enough to have health insurance through your employer, you already know that the premium is deducted directly from your paycheck. Or, if you pay for your own health insurance, there is still confusion about how to account for out-of-pocket expenses. So how do you budget for healthcare expenses, naming those that are not included in your salary? Here are the steps to budgeting for healthcare expenses:

1. Estimate your annual out-of-pocket healthcare costs. This includes things like copays, deductibles, prescriptions, dental work, vision care, etc. As a starting point, look at how much you spent last year.
2. Divide this annual amount by the number of pay periods in the year to get the amount per pay period. For example, if your annual expenses are $2,400 and you are paid biweekly (26 pay periods), you will budget $92.31 in salary ($2,400 / 26).
3. When setting your healthcare budget, be sure to account for any changes in healthcare costs you may expect in the next year, such as deductibles, new prescriptions, braces, glasses, etc. Add a reserve for unexpected expenses.
4. Review and adjust your premium amount quarterly or as needed based on your actual expenses and any changes in your health care costs.

According to Katie Tessin of Money With Katie , here’s an even simpler way to look at it: Take the annual out-of-pocket maximum for in-network doctors. Divide by 12. This is the monthly savings you should save for healthcare.

The key is to estimate your total annual healthcare costs, divide it by the number of pay periods to get the amount per pay period, and pay that amount consistently to save on healthcare costs. Be sure to review and adjust if necessary.

Other things to consider

As with all things healthcare, nothing is easy and it feels like it’s out of your control. It’s hard here. That being said, here are some tips to help you be as prepared as possible and gain peace of mind.

• Add an emergency fund. It is impossible to predict sudden injury or illness, so add a margin to your estimate. Try to save at least an additional 20% of your expected medical costs. This will help cover unexpected emergencies.
• Consider contributing to a dedicated health savings account . An HSA allows you to contribute pre-tax dollars that can be used tax-free for qualified medical expenses. An HSA can be used in conjunction with a high-deductible health insurance plan to pay for the out-of-pocket expenses you calculated above.
• Automate your savings. Set up automatic transfers from your paycheck to your HSA, if you have one, and to a designated savings account for health care expenses. Regular contributions instead of a lump sum payment will help you accumulate savings faster.
• Review and adjust annually. Reevaluate your expected healthcare costs each year during open enrollment season and adjust your premiums accordingly. Life circumstances and health needs change over time.