It’s no wonder why the middle-class American family has such a hard time getting ahead in today’s economic climate!
Outside of housing and transportation costs, the costs of healthcare and childcare are the next largest expenses that a household faces.
In the United States, for a family of four, healthcare costs alone could top $25,000+ annually, or on average 31% of the household income.
On the childcare front, in a 2018 survey on Care.com, 63% of parents stated that childcare costs impacted their career decisions, with 28% of parents seeking a higher paying job to help with costs, 27% asking for a more flexible schedule, and 27% switching from full-time to part-time status—a trend that most families cannot sustain and expect to save for their futures.
How is one supposed to get ahead?!
I want to offer a few obvious (and not so obvious) ways to impact your healthcare and childcare costs that are easy to implement, legal, and will help save thousands at tax time.
Healthcare is such a personal topic as everyone’s situation is different due to a myriad of factors. Below, I’ll define a few healthcare concepts and explain how either I or others have leveraged them. As always, seek professional advice from your benefits manager, CPA, or lawyer should you have additional questions.
1. Participate in group health insurance.
Also known as employer-sponsored health insurance or job-based health insurance, group health insurance is a type of group health plan that provides actual health insurance coverage (not to be confused with a “health plan”). A group health insurance policy is purchased by an employer (or employee organization) and is offered to eligible participants and to eligible dependents of participants. With group health insurance, the risk is spread over the company—the number of participants covered.
There are several types of group health insurance plans—including HMO, PPO, etc.—each offering varying levels of deductibles, coverage, and copays. Although many people feel drawn to top-tier insurance with the lowest deductible, if you are relatively healthy, it may be worth exploring getting a high-deductible plan (HDHP), which could save hundreds each year in premiums, copays, and may even qualify you for an HSA account (more on that in a bit!).
Our family of three noticed in 2016 we could save $2,814 in healthcare premiums by switching from a Platinum-tiered plan to an HDHP (same benefits and copays, only our deductible went up from $1,500 to $3,000 for the family—which we weren’t hitting anyway!). Making this switch also qualified us for an HSA account where we could stuff away $6,700 more pretax each year to cover our deductibles and copays. Or if we didn’t use it, we had the option to save it for future medical expense—and even retirement!
Depending on which type of group insurance you choose, you may also be able to combine your group plan with an FSA, HRA, and HSA, supercharging your savings and health coverage!
2. Check out the Affordable Care Act (aka Patient Protection and Affordable Care Act of 2010, aka “Obamacare”).
Better known as “Obamacare,” the ACA is the alternative for people who do not have a group health insurance plan available to them (or want to see if their state offers something cheaper). The premise is it makes healthcare more affordable for everyone by lowering costs for those who can’t afford them.
In order to participate, you will have to visit a health insurance exchange. Health insurance exchanges are online shopping sites that allow you to compare and buy health insurance plans. Some states run their own exchanges, though most allow their residents to use the one run by the federal government. People who don’t purchase a plan by the open enrollment cut-off date can’t get insurance through the exchanges; they can get short-term plans with fewer benefits.
3. Explore private health insurance.
Private health insurance is just health insurance that isn’t marketed by government-run agencies. These health insurance plans can be bought through private health insurance companies, health insurance agents, or online brokers.
Prices and coverage on private health insurance policies can vary greatly, so take care to review all fine print. My favorite use of a private health insurance policy is to cover the gaps of time between employers.
Related: 6 Different Ways to Hack Your Housing (Find One That Works for You!)
For those of you who are self-employed, it’s worth speaking with your CPA on the advantages or disadvantages of setting up your own group healthcare plan, participating in the healthcare exchange, or purchasing a private health insurance plan.
4. Research medical share programs.
Medical share programs are not insurances, but rather groups of people who all agree to share in each others health expenses. Before researching this article, I hadn’t heard of such a thing! However, here are the two that I found:
- Medi–Share is a non-profit, medical expense sharing program for Christians. Members share in each other’s health expenses. Essentially, each month, they place their monthly share (like a premium) into one big pot (technically a credit union account), and those with expenses use that money to pay their bills.
- Liberty HealthShare is a community of health-conscious people who practice longstanding Christian principles in sharing healthcare costs. Liberty HealthShare exists for everyone who purchases healthcare for themselves or their family or who wants to control their own healthcare. Please note, Liberty HealthShare is not insurance. It simply unites like-minded people to share medical costs together.
And then, there are the unique ways to get the U.S. government to be a partner in your healthcare savings.
5. Open a flexible spending account (FSA)
A flexible spending account (FSA) is a type of savings account that provides the account holder with specific tax advantages. Set up by an employer for an employee, the account allows employees to contribute a portion of their regular earnings to pay for qualified expenses, such as medical expenses or dependent care expenses (more on this in a bit!).
There are limits to how much participants can contribute to an FSA account per year. For medical expense FSA accounts, the limit is set by the employer. As of 2018, each FSA was limited to $2,650 per year per employee. If an individual is married, they may put up to that same limit of $2,650 in an FSA through their employer, as well.
The funds from an FSA can be used toward payment of certain authorized dental and medical expenses, including for dependents and spouses (some expenses may require a physician prescription).
Now for the very cool part: Contributions go into the account BEFORE taxes are calculated, effectively reducing your adjusted gross income up to $5,300 for a family in 2018. Beware, though: Anything you put in is use-it-or-lose-it monies within the calendar year. The best way to utilize this account is to track/estimate your qualified medical spending for a year and sock that much away the following year.
Should you reach the end of the year with a little left in the account, remember you can purchase certain drug-store items, bulk up your first aid kit, or sneak in some last-minute medical care to spend the rest, as long as it is a qualified medical or dental expense (massage, anyone?).
6. See if your employer offers a health reimbursement account (HRA).
A health reimbursement account (HRA) is an employer-funded plan that reimburses employees for medical expenses not covered by company-sponsored insurance.
Because the employer funds the plan, any distributions are considered tax-deductible to the employer. Reimbursement dollars received by the employee are generally tax-free.
According to the IRS, an HRA only covers qualified medical and dental expenses, premiums for qualified health insurance policies, transportation costs incurred to get medical care, and any amount paid for qualified long-term care (LTC). Employees can also use the money in their HRAs to cover the medical costs of their spouses and dependents. An employer’s list of qualified medical expenses will be outlined in its HRA plan document for employees.
At a previous employer, we had access to a wellness program (aka HRA) that allowed employees to offset copays, gym memberships, and arguably an annual ski pass! Many employers offer wellness classes, cooking classes, FitBits, even Apple Watches through their programs, so they’re worth checking out.
7. Contribute to a health savings account (HSA).
This is my favorite type of “health account” after having great quality health insurance!
An HSA is a tax-advantaged savings account available for people who are enrolled in a high-deductible health insurance plan.
Since people with high-deductible health plans could face more out-of-pocket costs due to the higher deductibles, the government provides tax incentives to motivate people to save for those expenses (in 2018, up to $6,900 for a family or $3,450 for an individual).
HSA account holders can contribute pre-tax dollars to the account and can then withdraw money from the account, tax-free, when paying for qualified medical expenses.
An HSA is the best (pardon my bias) retirement account there is! In a nutshell, the contributions go in tax-free, grow tax-free, and can come out tax-free before retirement age as long as they are used for qualified medical expenses. After retirement age, the account can be used much like a traditional IRA, except it can always be used for a qualified medical expense.
If you want to learn more about the Ultimate Retirement Account, check out the Mad Fientist Ultimate Retirement blog post.
8. Find out what additional health insurance benefits you have.
I put this as its own healthcare category because the benefits here can be significant. When you enroll in your health insurance provider, be it in a group or exchange, review their additional benefits section to understand what types of free or low-cost benefits they provide.
On my husband’s plan, we have access to:
- TeleDoc, a 24/7 on-call phone doctor that will cover even nutrition consults
- Biometric screenings annually
- Discount programs with various gyms
- Discounts on various exercise equipment and fitness trackers
I find that childcare is an even more personal choice than healthcare.
Whether you are a parent already or have a kiddo on the way, the below plan should help you control costs (and potentially get the IRS to help you out!).
9. Plan ahead.
I’m a planner—always have been. When my husband and I found out we were pregnant with our first child, we let our neighbors in on the secret early in hopes of tapping into their knowledge (since they were the proud parents of two kiddos). The first thing they told us to do, at 8 weeks pregnant, was to start looking at childcare facilities and get on waitlists. We were dumbfounded!
Begrudgingly, before picking out colors for blankets, cribs, even baby names, we tackled the daunting task on where our unborn “bun in the oven” would go to daycare in 11 months—when I would, in theory, go back to work.
Ultimately, this foresight allowed us to choose where our child would go for care and allowed us to be in the driver’s seat to control the costs. We found a great school within a mile of home that had the exact schedule we needed, and because we weren’t looking for last-minute care, we were able to bring down our weekly rate by over $50, saving over $10,000 over four years.
Related: Are Your Children Stopping You From Achieving Financial Freedom?
10. Draw a budget.
It goes without saying that most of us here are fiscally-minded or are striving to develop that muscle. And those of us who are parents only want the best for our kids. With that said, I see many parents seeking out daycares they simply cannot afford based on the assumption that they are better than a simple, safe, loving, and nurturing facility.
Case in point: I toured one facility that touted their flash cards of famous people taped to the walls at crawling level, and they claimed that a constant loop of Mozart led to higher high-school GPA scores (the facility had been open for five years—not exactly enough time to draw a causal conclusion). And that was the infant room!
In your search, understand realistic expectations for your budget and what is simply non-negotiable for you. (If Mozart on an endless loop is a non-negotiable, go for it!)
In my humble opinion, unless you have a child with special needs, there are many facilities that are safe, loving, and nurturing that I bet are in your price range—though they may not have all the extras.
11. Get flexible.
The adage goes, “It takes a village to raise a child.” So, getting creative with care can seriously impact your childcare budget by reducing the number of hours, even days your child is in care.
Here’s how our strategy as two working parents has evolved over the years.
My husband has worked four 10-hour days a month since our daughter’s birth, saving one day of daycare, for four years. By arranging our schedules to drop just one day of care per week, we estimate we saved $10,200 over the course of four years ($50/day x 51 weeks x 4 years).
When our daughter started kindergarten, instead of upping our days of coverage for her after-school program, we lowered them so we could spend more time together. I did this by shifting my schedule by 1.5 hours one day per week so I could meet her at the bus stop (my husband is still working four 10-hours). This move (plus my husband being home one day) is saving us $2,860 per year by dropping two days of after-school care ($27.50/day x 52 weeks x 1 year). Now we spend that extra time playing sports, swimming, or catching up on homework, allowing us to lead a less hectic life.
If you aren’t able to do this, you could set up a local child swap with other parents you trust in your neighborhood. Doing this one day a week or using it as a substitute for after-school care could mean huge savings to your pocketbook and a great opportunity for your child to group up in a community of people who love and support them.
12. Know your local programs.
Although this is outside the scope of this article, if you are in a serious financial need situation, your school or community government agencies can put you in touch with access to low-cost/no-cost childcare and after-school programs. Starting with your school principal or counselor is a good first bet.
13. Understand how a dependent care FSA works.
This is my second favorite way of using the tax code to share in my childcare expenses!
A dependent care FSA (DCFSA) is a pre-tax benefit account used to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare. It’s a smart, simple way to save money while taking care of your loved ones so that you can continue to work.
With a dependent care FSA, you use pre-tax dollars to pay qualified out-of-pocket dependent care expenses. The money you contribute to a Dependent Care FSA is not subject to payroll taxes, so you end up paying less in taxes and taking home more of your paycheck, resulting in an average of 30 percent savings on dependent care services, up to $5,000 in 2018.
Much like the regular FSA, the monies you contribute are use-it-or-lose-it within the calendar year, so make certain you are drawing it all out for qualified childcare costs before the end of the year!
Personally, our 2018-19 after-school and summer camp bill was $6,588. We will pay 100% of $1,588 of that cost ($6,588-$5,000). However, we will save nearly $1,500 in taxes this year alone by running the same money we would have spent ($5,000) through a DCFSA account.
Making it All Work Together
We’ve covered many ways to lower your healthcare and childcare cost—even how to use the IRS tax code to get a tax-break. Everyone’s situation is different, so be certain to speak to a tax professional to ensure you are strategizing and executing appropriately.
And the wonderful part is you can combine several of the tactics to supercharge your savings! Here is how I tackled our plan last year:
- Participated in a group HDHP with my husband’s employer (He had the best insurance at the lowest cost, as we are a relatively healthy family.)
- Maxed out our DCFSA account at $5,000 (Don’t have kids? Max out your FSA to the highest amount you know you will spend.)
- Maxed out our HSA account at $6,750 (the 2017 limit)
- Withdrew my employer’s HRA account at $1,000 (Yeah—ski passes!)
- Minimized days of needed after-school care by shifting work schedules, saving $2,860
- Had great insurance for a lower cost, with the ability to set aside costs to cover any premiums tax-free (thank you, HSA!), saving $2,814
- Lowered our adjusted gross income by $11,750 (combined HSA and DCFSA contributions)
- Lowered my childcare bill by $2,860 (and got time back with my kiddo)
- Got $1,000 in ski passes, tax-free!
So, pick up that open enrollment booklet—yes, the pile of paperwork that your employer sends you about this time every year—study it, and start taking advantage of all of the wonderful ways to maximize your benefits and lower your healthcare and childcare costs!
Which of the above do you take advantage of? Anything you’d add to the list?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.