Conventional wisdom says it’s smart to save up for unexpected expenses, like covering the basics after a job loss or settling medical bills after an emergency treatment. But because the costs of medical care can be so unpredictable — and often so wildly expensive — should you even try to save up for them and tap your rainy day reserve when they occur?
Yes and no.
Financial planners say you should set aside money for medical expenses — expected or unexpected — so if anything happens, you will at least have a cushion. But it’s not a good idea to drain your emergency fund on hospital bills so large that your emergency fund won’t cover all of it.
“If you were to drain all your emergency fund on that medical bill, let’s say a car breaks down,” says Juan Guevara, a certified financial planner based in Colorado. “Then the only resource at that point is getting into debt.”
In fact, if you can come up with other strategies to pay down those medical expenses, it may be wiser to preserve your emergency fund as much as possible. Here’s what you can do when are surprised by a big medical bill:
Ask for a payment plan
First, you should reach out to the hospital or doctor. Many medical institutions actually provide low-interest or even no-interest payment plans for patients who cannot pay bills — particularly big hospital bills — in full.
“Anyone whom you owe money to is a good place to start with: Is there some kind of financing they could provide?” says Catherine Hawley, a certified financial planner in California.
“There’s not one kind of ubiquitous standard, but it’s definitely something to look into.”
But you have to ask; this isn’t something hospitals are advertising.
Guevara says his family got a medical bill for more than $11,000 a few years ago after his wife had an emergency surgery. The couple called the hospital, asking if they could work out a payment plan, and the hospital agreed to a one- or two-year plan with no interest after an initial $4,000 payment.
“If there’s no interest, why not to spread it out a little bit more?” Guevara asks. He chose to pay off the hospital costs over two years.
It’s also possible to negotiate a lower bill with hospitals and doctors.
Guevara says some of his friends who didn’t have health insurance coverage have successfully done this. They explained their predicament while showing the willingness to pay in cash, and the hospital not only reduced the amount they needed to pay, it also provided payment plans.
“For a hospital, it’s better to collect something than collecting nothing,” Guevara says.
It’s OK to tap your emergency fund — just don’t wipe it out
When a huge, unexpected medical bill arrives, your emergency fund may not come close to covering it. Still, financial advisers suggest you save some money for such emergencies and tap part of your rainy-day fund when needed.
“You are making things a little bit easier for yourself,” Guevara says. “If you start treating a lot of things as not-unexpected, when it actually happens, you already have some money there.”
To come up with the $4,000 to cover part of his wife’s surgery costs, Guevara had to take $1,000 out of the family emergency fund, in addition to using funds from their Health Savings Account (HSA).
Guevara suggests that, as a rule of thumb, no more than half of your emergency fund should be applied to expensive health care costs.
For those who feel reluctant to touch their rainy-day cash for medical emergencies, Hawley recommends you learn what your out-of-pocket maximum is — the most you have to pay for health care services in a plan year — and include that amount in your fund. After you hit your out-of-pocket max, your insurance company covers your health care costs for the rest of the year.
If you anticipate a lot of medical bills in the coming year or have a personal or family history of medical problems, you might want to set aside separate money so you can preserve your emergency fund as much as possible, Hawley advises.
Take advantage of an HSA
People with a high-deductible health plan (HDHP) are eligible for a tax-advantaged Health Savings Account. Pros highly recommend that those who have an HSA use it not just as a medical fund for unexpected emergencies, but also as a long-term retirement savings account.
The money you put into an HSA is tax-deductible. The balance grows tax-free and rolls over each year. Withdrawals from your HSA for qualified medical expenses are not taxed.
The annual maximum HSA contribution in 2018 is $3,450 for an individual and $6,900 for a family. If you are at age 55, you can contribute an additional $1,000 annually.
“For very high medical bills, it’s not going to be the only answer, but it could be a nice piece of the puzzle,” Hawley says.
When a surprising hospital bill arrives, instead of paying for it in cash, Guevara suggests you take the money out of savings account and deposit it into your HSA first. Paying the medical bill with an HSA helps you save money, because then you can deduct that contribution on your income tax return.
An FSA (Flexible Spending Account) can be similarly helpful, though it can be tricky to decide how much to put in such an account: FSA funds must be used by the end of the year.
Enlist help from family and friends
Before resorting to credit cards or other types of loans, look for ways to pay bills without having to take on interest-bearing debt. You may not like the idea of asking for help, but a loan from a family member or friend may be your most affordable option.
“You gotta push yourself out of your comfort zone and ask for people to help you,” says Dan Andrews, a financial planner based in Colorado. “And put yourself in their position like, ‘If i was the loved one of the person that comes to me for help, I would want to help them.’”
What to do if after you dip into your fund
Replenish your fund after withdrawals so you’re prepared for future unexpected costs.
A drastic lifestyle change may also be needed so that you could redirect more of your money to pay down the medical debt. If you “don’t need a car as much as they used to, sell that, or maybe find other ways to increase your earnings,” Andrews says.
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