Budgeting for Health Care
It's probably safe to say that few people like to budget. But even fewer like the nasty surprises that could be in store if you don't plan ahead for your costs. So it's worth it to spend a little time budgeting for health care.
Think of health care budgeting like car budgeting. There's the regular monthly amount you know you're going to have to pay for car insurance and car payments. In health care, that's just like the fixed premiums you pay for health insurance. That's pretty easy to budget because it's a set amount every month. You may have these payments made automatically from your bank account or, if you get health insurance through work, deducted from your paycheck.
Then there are out-of-pocket costs. Some are small and routine, like filling up on gas or replacing a windshield wiper on your car, or making a copayment for a doctor's visit or prescription. In health care, these routine expenses are usually about the same from year to year. Try to estimate the amount you pay for prescriptions, copayments, and any other health-related purchases like glasses, physical therapy, or first-aid supplies over the course of a year. Add this amount to your premium costs to get your expected annual health care budget.
Other out-of-pocket expenses are bigger and less predictable. Say, for example, you get into a car accident or break your arm (hopefully not at the same time). Your insurance might cover some of the costs, but depending on your coverage, these types of incidents can lead to big, unexpected bills that you'll have to pay. You can't really plan if you'll have to go to the emergency room or need a big car repair. Whether it's your car or your health that needs to be fixed, it helps to save up just in case.
Planning a Budget
Now that you know your costs, you can start to budget for your health care. Figure out where the money for your expected annual costs (fixed premium payments plus routine out-of-pocket costs) is going to come from. Then decide if you can set aside some money in case a big, unexpected out-of-pocket expense arises. Fortunately, for big (and small) health care costs, you can use special savings accounts like FSAs and HSAs to pay for your out-of-pocket expenses. They can help you save money and budget your health care better. If only they had such a thing for your car ...
An HSA is a health savings account that you might want to pronounce "huzzah!" because it can save you a lot of money if you're enrolled in a high-deductible health plan. You save money because you don't have to pay taxes on money you put into an HSA to cover your health care expenses. To contribute to an HSA, you can either deduct money from your income at tax-time or your employer may give you the option to have it removed from your paycheck before taxes are taken out. Once you've figured out your annual health care budget, you can put that amount into your HSA to cover expected health care costs. The funds roll over from year to year, so HSAs are great for saving up in case of a medical emergency or a big health care expense like having a baby.
Say it loud: "hurrah!" An HRA, or health reimbursement arrangement, is an account your employer puts money into for you to spend on medical expenses. Your employer decides what you can spend it on. If you leave the health plan, you lose the money; otherwise, it rolls over every year.
There's no fun pronunciation for this one, but there's still plenty of savings to be had with an FSA, or flexible spending account. In an FSA, you choose to have a certain amount of money taken from your paycheck – pre-tax – and deposited into an account that you can use to pay for certain health care services. For information on what you can and cannot use FSA money on, check with your HR department or the official IRS publication. Unlike HSAs and HRAs, FSAs do not roll over at the end of the year, so don't put in more than you think you'll use each year.