How To Make a Budget for Health Care Expenses

You can make a budget for health care expenses in 4 easy steps. Image © JGI/Tom Grill/Getty Images

Everyone eventually needs health care, and everyone pays for health care—one way or another. You can either make a budget for health care expenses, paying small amounts as you go along, or you can wing it, hope you’ll never get sick, and pay huge amounts at unpredictable intervals when you do get sick.

If you’d rather plan for your health care expenses than wing it, there are four basic steps to making a budget for health care.

Tally Up Your Yearly Health Care Expenses

There are three types of health care expenses: ongoing expenses, unexpected expenses, and expected one-time expenses. To start a good personal health care budget, first add up all three types of health care expenses for the year.

Ongoing expenses are health care expenses that recur every month or year and are relatively predictable. Examples include:

  • monthly health insurance premiums,
  • cost-sharing expenses for health care services you know you’ll need like prescription copays for medications you take routinely,
  • Health care expenses your health insurance doesn’t cover but that you need regularly. Things like over-the-counter medicines and condoms fall into this category.

Unexpected expenses are harder to pin down because they’re less predictable. However, since they can be bigger than your ongoing expenses when they occur, you’ll be wise to set aside some money for them.

How do you budget for something you don’t expect? A good place to start for this item is to look at your health insurance deductible. Some people use their health insurance in such a way that they pay their full health insurance deductible every year. If this is your case, you’ve probably already included your deductible among your ongoing expenses.

However, if you don’t usually spend enough on health care expenses to satisfy your full deductible, consider budgeting to set aside enough money to pay the full deductible anyway. That way, if you have an accident, need surgery, or become seriously ill, you’ll have enough saved up to pay your deductible. If you don’t end up needing enough health care to satisfy your entire deductible, you’ll have money left over you can put toward next year’s deductible.

Do you already have enough in savings to pay your deductible? Consider putting aside a bit more for coinsurance costs in case you get seriously ill. Here’s why: after you’ve met your deductible, your health insurer will start paying its share of your health care bills, but you’ll still have to pay your part. If your health insurance policy requires a coinsurance of, say, 30% for hospitalization, you can end up owing a sizable amount. Thirty percent of a hospital bill is a lot of money. You’ll be more able to pay it if you budgeted to put savings aside for it.

When can you stop squirreling money away for unexpected health care expenses and start saving for other things instead? Take a look at your health insurance out-of-pocket maximum. That’s the most you’ll have to pay in any given year toward deductibles, copays, and coinsurance. Although there are some things that aren’t included in the out-of-pocket maximum, if you have enough savings to pay your entire out-of-pocket maximum, you’re doing really well in budgeting for health care expenses.

One-time expected expenses are expenses you can predict you’ll have this year, but they’re not routine and recurring. You may or may not have any one-time expected expenses this year. Here are some examples:

  • You plan to have vision correction surgery and your health insurance doesn’t cover it. You’ll be paying the entire cost out-of-pocket.
  • You’re planning an adventure-travel foreign vacation and need travel shots and emergency medical evacuation insurance.

Identify Where the Money Will Come From

Once you’ve added together all of your expenses for the year, you’ll need to figure out where the money to meet these expenses will come from. If your health insurance is through your job, you have different options than if you buy your own health insurance or have Medicare.

For example, if your health insurance is job-based, you probably have your premiums automatically deducted from each pay check. If you have Medicare Part B, you may have your premiums deducted from your monthly Social Security check. However, if you buy your health insurance through your state’s health insurance exchange or directly from a health insurance company, you’ll need to make monthly premium payments, so you’ll need to budget for those payments.

Consider expenses that are automatically deducted from your paycheck or Social Security check to have been taken care of as far as budgeting for health care goes. You’ve already figured out how to pay for those expenses. However, for the remaining expenses on your list, you’ll need to come up with the money to meet the expense.

Since it’s easier to come up with consistent amounts of money on a monthly or per-paycheck basis, consider setting aside the necessary amount in equal increments each month or every paycheck. For example, if your yearly health care budget requires $2,400 to pay expenses that aren’t already being deducted from your paycheck, consider allocating $200 every month.

Balance Your Budget

If the amount you have to allocate toward your health care budget every month is bigger than you can possibly afford, you may have to balance your budget by decreasing your health care expenses or increasing your available income.

Decreasing your health care expenses can be tricky, especially when it comes to health insurance. If you try to save money on health insurance premiums by choosing a cheaper health insurance plan, you may end up with health insurance that pays less toward your care. Learn more in “Why Not Just Buy the Cheapest Health Insurance?

Having a health plan that pays less toward your care isn’t a problem if you don’t usually need health care. However, if you use your health insurance a lot, you could ultimately pay more for health care expenses because your health insurance covers a smaller percentage of your health care bills. 

If you predict you’ll be using your health insurance a lot and paying a lot in deductibles, copays, and coinsurance, you might save money overall by choosing a health plan that offers more robust coverage even if the premiums are a little higher. This is a judgment call that can only be based on your personal usage patterns.

Take Action

The last step in making a budget for health care expenses is to take action to make your budget a reality. If you’re buying your health insurance through your health insurance exchange or directly from a health insurance company, set up a recurring payment plan. For example, you might set up recurring online bill payments from your checking account.

If your health care budget requires saving money towards your deductible, consider signing up for a tax-advantaged account. Many employers offer Flexible Spending Accounts during open enrollment and will fund the FSA directly from your paycheck every month. 

If you have a qualified High Deductible Health Plan, a Health Savings Account is an excellent way to save for health care expenses. You can arrange for direct deposits from your bank account into your HSA. If your HDHP is associated with your job, your employer may allow funding directly from your paycheck each month.

If you’re not eligible for an FSA or HSA, then you’ll need to come up with another way to set aside the money you’ve budgeted for health care.  A simple savings or money market account is fine, and you may even already have one.

Although the specific details of how you pay your recurring health care expenses and how you save for unexpected expenses will vary, what’s most important is that you make a plan for recurring payments, make a plan for required savings, and that you stick to your plans.

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