24% of Workers Are Making This Huge Financial Mistake

by Maurie Backman | Published on Oct. 13, 2021

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Don't fall into a similar trap.

There are certain expenses it's important to budget for regularly, like housing, transportation, food, and utilities. But according to the 21st Annual Transamerica Retirement Survey, 24% of workers today do not save for what could be a whopping expense -- healthcare.

If you don't have funds set aside for medical expenses, you could end up in a world of financial pain. Medical debt is a big cause of personal bankruptcies, so avoiding it if possible is crucial. Here are some tools you can use to sock money away for healthcare costs.

1. A savings account

It's a good idea to keep money in savings for unplanned bills. But you may want to open a separate savings account dedicated to healthcare expenses.

While individual health issues may catch you off guard, healthcare is something you should expect to spend money on regularly if you can. So it's a good idea to factor healthcare into your monthly budget to make sure you have funds available to pay for it.

Now, if you get health insurance through your employer, you probably have your share of your premiums (the fee you pay for insurance) deducted from your paychecks automatically. But you'll still need to cover the cost of copays when you see a doctor or fill prescriptions.

Plus, your health plan may have a deductible you need to meet before your services are covered. Say you have a $1,000 deductible. You'll need to pay that much out of pocket before you're only responsible for a portion of your healthcare costs. And so it's important to have at least that much money on hand, whether in a savings account or elsewhere.

2. A flexible spending account

A flexible spending account, or FSA, lets you set aside pre-tax dollars for healthcare expenses. If you contribute $1,000 to your FSA, you won't be taxed on that $1,000 of earnings, for example. But if you were to put $1,000 of your income into a regular savings account, you'd be liable for taxes on it. That's what makes FSAs worthwhile.

The downside of FSAs is that they require you to estimate your healthcare costs for the year ahead of time. Then, any money from your FSA that you don't use up within your plan year gets forfeited (though some plans let you carry a portion forward or extend a grace period).

If you sign up for an FSA, your contributions will be deducted from your paychecks. Then, when you need to cover healthcare costs, you can use your FSA-issued debit card to pay for them directly. Or you can pay with a check or credit card and submit a claim for reimbursement to your FSA issuer.

3. A health savings account

A health savings account, or HSA, works like an FSA, but there are a few key differences. First, HSA funds never expire, so there's less pressure to estimate your healthcare costs on a yearly basis. If you contribute $1,000 to your HSA one year but only rack up $300 in medical costs, the remaining $700 isn't forfeited. In fact, money in your HSA that you don't use right away can be invested so it grows into a larger sum.

The other difference between FSAs and HSAs is that most people can open an FSA. To open an HSA, you must be enrolled in a high-deductible health insurance plan. The definition of that changes every year. For both 2021 and 2022, you'll qualify if your health insurance plan comes with a deductible of $1,400 or more for individual coverage or $2,800 or more for family coverage. It's possible to qualify for an HSA one year but not qualify the next.

Healthcare is one of those expenses that's unavoidable. To avoid financial stress, make sure to account for it when you set up your budget and that you have money on hand to pay for it. Once you start racking up medical debt, things can quickly spiral, so you're better off not getting anywhere near that point.

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