If you spend time researching how to create a budget, you’ll find that most of the advice given includes saving for things like housing, child care, home repair, and vacations—but usually not healthcare.
To help, this article shares practical tips for healthcare budgeting. Below, you can find an overview of the types of healthcare expenses everyone should be budgeting for, as well as some basic tactics for budgeting.
Which healthcare expenses should you budget for?
To figure out your estimated annual healthcare costs and medical expenses, you need to do a few things: get intimate with your health insurance (if you have coverage), figure out what your anticipated “routine costs” will be, and plan for emergencies.
Your health insurance
Personal finance expert Laura D. Adams, host of the popular "Money Girl Podcast," says that the first step to budgeting for healthcare is to really understand what your insurance is going to cover.
“Insurance coverage is so basic, but there are a lot of people who don’t really understand how it works because they’ve never had to use their plan before. If you’re paying for a policy, get to know what you’re actually paying for,” Adams explains.
So, if you have health insurance, check out the specifics of your plan—if you don’t already have a copy of exactly what your plan covers, get one from your employer or insurance company. This will help you estimate what you need to plan for as closely as possible. The following are all expenses that should be taken into consideration when adding insurance-related healthcare costs to your budget:
Monthly insurance premium. Your monthly insurance premium—the amount you pay to maintain health insurance each month—is the most obvious expense to budget for. If you have health insurance through your employer, they may cover this for you. Be sure to ask! If you have a private insurance plan, are covered through the Healthcare Marketplace, or your employer does not pay your premium, you’ll want to specifically set aside enough money each month to fully cover this recurring expense.
Your deductible. This is the amount you must pay in a given year for covered healthcare services before your insurance kicks in (although even then, you’ll still have to pay your fixed co-pay and co-insurance for certain types of visits). Your deductible is likely one of the largest healthcare expenses you’ll have, especially if you’re on a high-deductible insurance plan. Deductibles can vary greatly—some are as low as $250, while others can be upwards of $2,000. Find out what your deductible is, and use that as a baseline for what you need to budget for.
Co-pay. A co-pay is a fixed dollar amount that you pay for services or prescriptions, and it counts towards your deductible. This is a smaller routine cost, but it can add up. For example, if you estimate that your co-pay for a prescription is $20, and you need to get that prescription filled 5 times in a given year, you can estimate that you’ll be paying $100 for that prescription annually. Check with your insurance company to find out what your exact co-pay amount is for different types of services, then build your budget accordingly.
Out-of-pocket max. Your out-of-pocket max is the most you’ll have to pay in a given year for healthcare before your insurance covers 100% (that includes co-pays and co-insurance). This will likely be a significantly larger number than your deductible. Laura Adams says, “The out-of-pocket maximum is kind of like the worst case scenario—understanding what that maximum could be in the event the you have a serious accident or illness is important.” If you can afford to set aside your out-of-pocket max (instead of your deductible) each year to cover any healthcare costs that might come up, you’ll be in great shape.
Co-insurance. Co-insurance is a fixed percentage you have to pay for medical services, like a hospital visit, even after your deductible has been met. It can be trickier to budget for this—but if you’re budgeting for your out-of-pocket max as your baseline, you don’t need to worry too much about this expense.
Routine healthcare costs
Health insurance is technically a routine cost, if you’re paying monthly for a premium, anticipated office visits, and prescription drugs. But other routine medical costs need to be taken into consideration. Examples include over-the-counter drugs like allergy medicine, new eyeglasses or contact lenses, hearing aids, or other medical equipment that you need to use on a routine basis. These may seem like small expenses, but they add up.
Emergency medical costs
Finally, you need to budget for an emergency. Laura Adams explains further: “Coming down with an illness, getting hurt in an accident, or needing advice from a specialist are the types of unpredictable and variable expenses that you simply can’t avoid. Have an emergency fund of at least 3-6 months’ worth of living expenses on hand in these situations.”
If 3-6 months’ worth of living expenses on hand seems unreasonable, your out-of-pocket maximum amount is a good goal for your emergency fund. If that's still too much, at the very least save the amount of your deductible each year to cover that expense.
How to build your annual healthcare budget
Now that you know what to budget for, let’s look at how to budget for it. There are many different options for managing the cost of your healthcare.
Just like you’d budget for rent, food, clothes, or a vacation, figure out how much each month you need to save to contribute to the healthcare costs outlined above: your premium and other routine costs, along with what you need to set aside for an emergency fund for unexpected costs.
Laura Adams provides some great advice:
“Setting aside a minimum of 5% of your net income for fixed and variable healthcare costs is a smart plan. But to really understand what your future costs may be, look to the past. Review your expenses over the past year (or several years if you have the data available) and add up what you spent on all types of healthcare.
Then consider how your needs could change. Are you ready to start a family? Do you have nagging health issues that you’ve put off and finally want to address? Are you planning to leave your employer and work for yourself?
Take your average annual healthcare cost, plus any additional expenses you anticipate, and divide by 12 for an amount to budget per month. If it seems high, you may need to cut back in other areas or consider how you could earn additional income to make sure you won’t overspend.”
Here’s an example for an individual with no dependents:
- Monthly premium: $100 — $1,200/year
- Out-of-pocket max of $6,000 for emergencies — $6,000/year
- Routine costs for prescriptions: $50/month — $600/year
= $7,800 annual budget for healthcare costs or $650/month.
Keep in mind: if you are able to put aside enough money to cover your out-of-pocket max, you should be in very good shape. Chances are, your healthcare expenses will be below your out-of-pocket max—so next year, you can replace only what you spent.