Adults often feel the pressure to act responsibly with everything related to their well-being and their wallets. And nothing says âadulting” quite like budgeting for medical expenses. It’s easy to think that health insurance will cover the majority of medical-related costs and thus can be overlooked in your budgetâa copay here, a deductible there… all can be handled without much ado, right?
Not so fast. Medical expenses should be a top budgeting priority, with out-of-pocket costs on the rise and the always-present risk that an unexpected medical expense could put a ding in your spending plans. Consider this: On average, healthcare costs account for about 8 percent of annual household spending, or nearly 7 percent of pretax income, according to the Bureau of Labor Statistics. Even if your health insurance kicks in to cover an expense, your budget for healthcare costs still needs to include your premiums (AKA the amount you pay for your health plan).
How do I budget for healthcare costs, you ask? Fair question. This can sound like a lot. To better plan for healthcare costs, consider these five steps:
1. Determine your total healthcare budget
When budgeting for medical expenses, it may be helpful to bucket your healthcare costs into three categories:
- Fixed Premium: This is the set amount you pay for your health insurance. If you get health insurance through work, this expense may be deducted automatically from your paycheck.
- Routine: These are your anticipated healthcare costs, even if they fluctuate. Think your copay for your annual checkup or the cost of a regular prescription.
- Unexpected: These costs can be difficult to predict, like an unplanned trip to the emergency room or an urgent medical procedure.
When it comes to planning for healthcare costs, your medical and spending history is key. âThe best place to start in determining how much to budget for healthcare costs is to look at how much you actually spent on healthcare previously,” suggests CPA and personal finance blogger Logan Allec.
You can start by reviewing all of your receipts from your insurance company and healthcare providers and going through your bank and credit card statements to flag any healthcare costs you paid out of pocket over the past year, Allec says. (If you didn’t save all of last year’s receipts, don’t stress. You can contact your insurance and healthcare providers for documentation.) The final number you come up with is a good start for determining your annual fixed and routine healthcare expenses. (Those unexpected curveballs mentioned earlier? See tip 3.)
When budgeting for healthcare costs, Allec also says to anticipate if you’ll have any extra costs this year that you didn’t encounter last year. For example, are you scheduling a surgical procedure or expecting a child? Make sure you understand how much you will have to pay out of pocket by reviewing exactly what your insurance covers annually, and factor that into your plan for healthcare costs.
2. Put your health at the top of your priority list
Once you’ve estimated your annual healthcare costs, consider how you prioritize them against your other essential expenses, says Todd Christensen, blogger and financial educator from Money Fit.
As a guide, Christensen says that healthcare expenses should fall between necessities like your mortgage or rent, taxes, food, transportation and phone. âIf you have a hard time paying for prescriptions but make monthly payments to your cell phone provider, then you have prioritized your personal communications over your health,” he adds.
From budgeting for your insurance premiums to preparing for doctor visits and ordering prescriptions, think of paying for healthcare expenses as a “need” instead of a “want,” Christensen says. By adjusting your mindset to give your health the significance it deserves, budgeting for medical expenses will become second nature.
3. Set up an emergency fund
Remember those unexpected healthcare costs that are tricky to plan for? When creating a budget for healthcare costs, Christensen suggests creating an emergency fund. An emergency fund is an account that is set aside to help cover an unexpected financial or medical emergency, such as a procedure or medication that is not fully covered by your insurance plan.
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Experts typically recommend saving at least three to six months of living expenses in your emergency fund so you can pay for unexpected expenses without having to take on debt or dip into savings earmarked for other financial goals. But, according to Christensen, if you’re starting an emergency fund from scratch, it’s best to start small and focus on a goal that’s attainable for you.
“Initially, the amount is less important than the commitment to just do it,” Christensen says. Managing the account, however, does require some discipline. For example, going on a 10-day wellness retreat, however therapeutic the massage sessions may seem, probably does not qualify as an emergency.