Medical Bill Savings: Why Americans Need an Emergency Fund

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A recent survey reveals that some people aren't prepared to cover healthcare expenses.

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Key points

• Many Americans haven't saved much to pay for healthcare expenses and risk debt as a result.
• There are a few ways to save for medical care in a tax-efficient manner.

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It's an unfortunate fact that even Americans with health insurance can wind up with medical bills they struggle to cover. In fact, medical debt is a common source of personal bankruptcy filings in the U.S.

For this reason, it's important to set aside money to cover healthcare expenses. But in a recent survey by HealthCareInsider.com, 43% of respondents say they have less than $500 to pay for medical bills. Around a quarter of respondents have no money saved for medical expenses.

If you'd like to avoid debt due to medical bills, it's important you save for those expenses as best as you can. If you don't, you could be setting yourself up for some dire consequences.

Interest charges and credit score damage

If you rack up medical debt and fall behind on it, you'll risk being reported as delinquent to the credit bureaus. Once that happens, your credit score could take a serious hit.

Furthermore, if you're forced to put your medical debt on your credit cards, leaving you with a large balance, that, too, could damage your credit score. Whenever you use too much of your available credit at once, your credit score can take a hit. For example, if you have a total spending limit across all of your credit cards of $10,000, but you're forced to carry a $7,000 balance due to medical debt, your score will likely suffer.

Also, the more medical debt you rack up, the more interest on it you might accrue. It's important to set money aside for healthcare expenses to avoid that fate.

How to save for medical bills

You have several choices when it comes to saving for medical expenses. First, you can always put extra money into a savings account. If you're not sure how much to save, take a look at how much your health insurance deductible is. (That's the amount you have to pay before your insurer starts paying for your services.) If your deductible is $1,000, that's the minimum amount you should save for medical bills.

Furthermore, you may want to consider putting money into a flexible spending account (FSA) or health spending account (HSA). You can sign up for either account through your employer, though not both at the same time.

Both FSAs and HSAs let you set aside pre-tax dollars for medical purposes, so you get to save money by having less of your earnings taxed. However:

• HSAs are only available to people with a high-deductible health insurance plan, the definition of which changes every year.
• FSA funds must be used up by the end of a given plan year, whereas HSA funds roll over and can be used at any time.
• HSA funds can be invested for added growth, while FSAs can't be invested.

No matter how you decide to save for medical bills, don't make the mistake of not setting funds aside for healthcare. Even if you have insurance, you may still be on the hook for a sizable deductible. Plus, your various co-pays and other out-of-pocket expenses could add up. The last thing you want is to land deep in debt because of medical bills -- or, worse yet, be forced into bankruptcy if you really can't keep up.

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