Large Medical Expense: Pay it off completely or take the interest free payment plan?
This isn’t really a YNAB software question more of a YNAB money management question. My family has a large medical bill that was not covered by our insurance. We have enough money in our savings to pay it off but my wife is considering taking up the hospital’s offer for an interest free payment plan for 18 months to pay it off instead of doing it in one big payment. I’m leaning towards using our savings to just get rid of the debt. What do you guys think would be the best plan?
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I'm always in favor of taking a zero interest payment plan as long as you have the money to pay it off, so you can earn some interest.
That said, how large are we talking? For example, if it was $10k, over 18 months at 2% in a HYSA paying off 1/18 of the balance monthly you'd have earned about $160 in interest. Smaller balances would earn smaller.
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You say you have the money in "savings". That's where it might be a problem because what does "savings" even mean? Is it just the balance of your saving account and you haven't given jobs to those dollars? Or is it for Emergency Fund? What happens if in Month 16 your car gets totaled? Where will those funds come from.
If told me that you have the money in your medical category and you are disciplined enough not to WAM out of it for the next 18 months, I'd say yup, do the interest free financing.
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Depends on your discipline.
Zero-interest loans are great. The longer you hold onto your money, the more interest you can earn from it. Could be hundreds of dollars over 18 months depending on the amount and your interest rates. Who wouldn't want extra money?
But that assumes you're holding onto your money. I.e. it's earmarked in a "Hospital Payment" category in your budget that you leave untouched. If you instead leverage that debt money to buy other shiny things, then obviously you wouldn't be earning interest from it, and you'll be at greater risk: If an emergency arises, you might not have the resources to make your payments.
Another (minor) factor to consider is credit reporting. I don't take advantage of every zero- (or low-) interest financing offer that comes my way because I'd rather not have dozens of active accounts that negatively affect my credit score. That could come back to haunt me if/when I want to apply for a sizable loan and am shopping for the best possible interest rate (e.g. house/car stuff.)
Good luck, and congrats on having the financial resources to absorb a large medical expense! Great to have options! -
The savings that I have is in an off budget account that isn’t categorized for anything specific but really is more of a general rainy day savings than anything else. I like keeping it off budget because it gives me that feeling of scarcity when I look at my on budget accounts but in reality we do have some security there off budget. Although we won’t be getting much interest earned on my rainy day savings I think we’ll be taking advantage of the interest free payment plan because if another emergency comes up we might not have an interest free option to pay that off. Thanks for the help! Thinking of another emergency like a car accident or something along those lines helped. Any further ideas or thoughts would still be helpful if anyone still has input.
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Lito D It's the categories that provide the scarcity, not the accounts. I think some people here would be shocked if I told them the amount of money currently in our budget, but none of that matters because it's the categories that tell me what the money is for.
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Lito D said:
isn’t categorized for anything specific but really is more of a general rainy day savings than anything else"General Rainy Day Savings" is a perfectly reasonable category to have in your budget. Many people call it "Emergency Fund."
I'd discourage you from trying to synchronize accounts and budget categories. It goes against the grain of YNAB and is often an indication that you're not fully embracing the methodology.
Money held in reserve for (potential) car repairs, loss-of-income, future vacations, and yes, paying off your zero-interest hospital loan, could all be described as "savings." Storing it in a high interest yielding savings account is a good cash-management strategy. It should probably be fairly liquid, because you never know when you might need it.
But you don't need to fret about making the sum-total of those various "savings" categories perfectly match the balance of your savings account. It's a lot of work for very little benefit. Instead, simply monitor your cashflow periodically and make adjustments as needed. Checking account getting too "fat"? Transfer some money to savings where it can earn better interest. Big upcoming expense that you can't cover from checking? Transfer some money back. Keep it simple.
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bret said:
Another (minor) factor to consider is credit reporting. I don't take advantage of every zero- (or low-) interest financing offer that comes my way because I'd rather not have dozens of active accounts that negatively affect my credit score. That could come back to haunt me if/when I want to apply for a sizable loan and am shopping for the best possible interest rate (e.g. house/car stuff.)Credit scores bounce back from paying off cards pretty quck. If you want to apply for a mortgage in September 2020, just pay off all the zero interest stuff in June.
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And most in house medical payment plans don't report anyway, IME .
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bret said:
I'd rather not have dozens of active accounts that negatively affect my credit scoreToo many accounts will decrease a credit score, but more available credit often improves a credit score. A balance, of course, is a good thing.
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dakinemaui
I think frequently opening and closing credit accounts would reduce average age of credit and be a drag on one's credit score.
Disclaimer: Not a credit score expert, mostly ignore mine. Just tossing it out there as something to consider! -
bret As soon as you close it, the average age goes up again because it's the average of the open accounts. That's one reason why it's recommended you don't close your oldest accounts.
I had this bite me once when I had an old account close itself for lack of usage. Triple-whammied my score because a) average age decreased, b) available credit dropped, and c) utilization increased. I now buy a soda every 6 months or so on these little-used cards.
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I'd take the interest free option just in case another big medical bill or other attack of life strikes in the next few years, like if we needed to replace a vehicle/the HVAC, or even worse, attend a funeral on short notice. Can't get an interest free payment plan on last minute flights and hotel reservations. We spent over $3000 to get my family back to state of origin to attend my father's funeral. We were able to stay with family and use their car. That's with having about two week's notice before the funeral; the airfare alone would have been more like $3500 or more on last minute flights.
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I personally don't think there's a right or wrong. If you have the money, plus some extra, I personally would pay it off to free up the cash flow. Or take the 0%, but try to pay it off in 9 months instead, knowing I have the extra time. I personally would just love to not have debt.
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Couple of more thoughts:
How good is the medical providers tracking of this account? One of our hospitals is terrible on the accounting side. I've tried a payment plan with several times and it was never worth it; payments applied to wrong account, lost payments, bad math when payment is applied, etc.
Are there a tax implications? Over the past few years I've planned out medical payments to have a 'big' medical year where everything is paid in full, followed by a 'small' medical year where I make payments, then another big year where I pay it all off. For taxes, in the big years, we meet the minimum to take the medical expenses deduction. In the small years we don't. If I didn't manage it this way, they'd all be small years and we'd not get any deductions. This has mostly been due to braces and other planned medical events. Of course, I'll be happy when I don't get the medical deductible anymore, because that means I'm not spending as much on medical.
Have you looked at a true itemized bill? Back to our hospital stays, we've found about $1,000 of wrong on a $12,000 bill by looking at every line. It took a lot of requesting to get a true itemized bill, not just a summary level with a few lines, but like every medicine, every meal, etc.
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free money is free money. I would take it.
