Things I’ve learned so far: The financial margin, Part IV – Medical expenses

This post is part of a series called “The margin”.  If you missed the introduction, you can go back and read it here.  In this part of the series, I’m talking about building in a financial margin when you consider your budget for expenses.  This is the fourth installment on the financial margin.  If you missed the first three you can read them here, here, and here

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Part IV: Medical expenses

This is another big (and unpleasant) one.  If you don’t have health insurance, look into getting it.  With the Affordable Care Act it is more accessible than ever.  Get acquainted with the options (and potential subsidies) available you at www.healthcare.gov.  There is information on calculating the cost of insurance, determining eligibility for public insurance and subsidies, and applying for insurance through the Health Insurance Marketplace.  Enrollment began October 1st and if you enroll by December 15th you can be covered as early as January 1, 2014.

Even if you do have insurance, illness, injury or pregnancy and childbirth can drive up your spending on medical care.  If you’re subject to a deductible, it’s a really good idea to open a Health Savings Account (HSA) to set aside pre-tax dollars to cover the expenses you incur before the deductible is reached.

For additional information, you can check out Wikipedia’s dense but decent description of HSAs.  The official source on this topic is the IRS, but I found their document to be a little less user-friendly.  Here’s a link to the IRS site for your reference.  It is more detailed (and presumably accurate) than Wikipedia, so it may be worth skimming if you have specific questions.   In addition, individual banks have information about the HSA accounts they offer.  (I’ve been meaning to do this for a year, so do as I say not as I do.  But I pledge here to open one by the end of the year.  There, if I follow through, I won’t be a total hypocrite.  Will you take the pledge?)

By the way, an HSA can save you money even if you just use it to pay for co-payments, prescriptions, and doctor-prescribed over-the-counter drugs, because contributions to the account are made prior applying payroll taxes to your income.  So if you’re marginal tax rate is 25%, it’s like saving 25% on all the payments you make from your HSA.

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While the tax benefit it great, an HSA’s hidden benefit is that it rewards you forces you to acknowledge that medical expenses will come throughout the year.  It provides a perfect opportunity to build in a margin by saving for a few more doctor’s visits, ER trips and prescriptions than you think you’ll really need.

If your job doesn’t pay sick time, you should also consider the cost of lost wages when thinking about the margin you may need to cover unexpected expenses related to illness or injury.

A note about emergencies

The items I’ve listed above as having the potential to wreck your financial diet, as upsetting as they can be when they crop up, are just the regular unexpected things you’ve gotta expect out of life.  Preparing to cope with major illness, death, job loss or other devastating events is another matter entirely.  A margin isn’t going to get you through a hit of that magnitude.  That requires an emergency fund, preferably 6 months’ worth of living expenses saved in a stable, secure and liquid form (e.g., savings or money market account).

I’m just talking here about building in a buffer (or margin) for the (now-seemingly-trivial-after-bringing-up-death) expenses that are inevitable but unpredictable.  A margin to cover life’s little emergencies.  (Wasn’t that phrase used in a credit card campaign several year’s back?  And while we’re on the subject, no, a credit card isn’t for life’s little emergencies.  If you use it that way the creditor will tack on its own margin for you.  It’s called interest.  And that really adds to the sting of an unexpected car repair bill.)   Building up an emergency fund, to cover your most basic expenses in the event of something truly catastrophic, is a separate and very worthy goal.  But it’s also a topic for another day.

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Disclaimer: I’m no financial pro, nor professional.  I do have common sense, some life experience, and smart friends who know about these things.  However…

The information provided in this post is my personal opinion and does not constitute professional financial advice. The information is of a general nature only and does not take into account your individual financial situation or needs. If you need financial advice, Economist at Home recommends that you contact an appropriate professional.  Furthermore, while this post may contain links to third party websites, these have been provided solely for further information.  Economist at Home is not responsible for their content.   The inclusion of links to a third party website is not an endorsement of the content provided or the third party itself.

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