This Is How Much You Need to Budget for Health Expenses

Thinking about our healthcare system gets me so worked up, I need to take a hit from the inhaler that I can barely afford. Although I’m lucky to be employed and (mostly) healthy, budgeting for healthcare is still a nightmare. Unexpected health expenses can take a devastating bite out of your budget if you don’t plan for them. Having adequate savings set aside for medical costs can provide peace of mind and prevent debt. But outside of the chunk taken out of your paycheck (or that you’re paying for out of pocket), how much money should you be budgeting for healthcare expenses? The numbers vary wildly depending on your insurance plan and health needs, but let’s take a look at how to calculate what’s wise to budget for health expenses.

Health insurance terms you need to know

First, let’s briefly review definitions of some of the health insurance terms you need to know.

• Deductible. Your deductible is the amount you pay for your health services before your health insurance starts paying its share. If your deductible is $1,500, for instance, you have to pay that much on your own before your insurance will kick in and start paying the rest. Some services, like preventive physician visits, might be covered before you pay your deductible, however, so be sure to carefully read over your plan.
• Premium. The premium is what you pay to the insurance company to have your plan. You could pay this monthly—as most people do—or quarterly or annually. If your premium comes straight out of your paycheck, it’s deducted from your pre-tax pay and your employer also likely pays part of the share. If you got your plan through the ACA marketplace, there are tax credits available to help you offset the costs of your premium.
• Out-of-pocket limit. This refers to the maximum you will pay during your policy period, which is typically one year, before your plan starts to pay 100% of your allowed amount. The costs of your deductible, co-pay, and co-insurance are included here, but not your premium.
• In-network/out-of-network providers. When making appointments with various doctors and service providers, you may notice some are listed as “in-network” while others are “out-of-network.” Any provider or facility that is in-network is one that has contracted with your health insurer to provide services. Depending on your plan, if you visit an out-of-network provider, it may not be covered or may only only partially covered. You can expect a higher deductible and out-of-pocket limit at out-of-network providers. Your coinsurance and copayment may also be higher for out-of-network providers.

If you know nothing else about our convoluted healthcare systems, the terms above are a good place to start figuring out your budget needs.

How to budget for healthcare

If you’re lucky enough to have health insurance through your employer, you already know that your premium is deducted straight from your paycheck. Or, if you’re paying for your own health insurance, there’s still confusion around how to account for out-of-pocket costs. So, how should you budget for healthcare expenses, name those outside of what gets taken out of your paycheck? Here are steps to budget for healthcare expenses:

1. Estimate your annual out-of-pocket healthcare costs. This includes things like co-pays, deductibles, prescriptions, dental work, vision care, etc. Review what you spent last year as a starting point.
2. Divide that annual amount by the number of pay periods in a year to get a per-pay-period amount. For example, if your annual expenses are $2,400 and you are paid bi-weekly (26 pay periods), you would budget $92.31 per paycheck ($2,400 / 26).
3. When setting your healthcare budget, be sure to account for any changes in healthcare expenses you may anticipate in the coming year, such as hitting your deductible, new prescriptions, braces, glasses, etc. Add a buffer for unexpected expenses.
4. Review and adjust your contribution amount quarterly or as needed based on your actual expenses and any changes in your healthcare costs.

Here’s an even simpler way to look at it, according to Katie Tassin of Money With Katie: Take your annual out-of-pocket maximum for in-network doctors. Divide by 12. That’s the monthly savings you should budget for healthcare.

The key is to estimate your total annual healthcare costs, divide by number of pay periods to get a per-pay period amount, and contribute that amount consistently to build savings for your healthcare expenses. Be sure to review and adjust as needed.

What else to consider

As with all things healthcare-related, nothing is easy, and everything feels out of your control. It’s tough out here. That being said, here are some tips to be as prepared as possible and buy you some peace of mind.

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