You can make a strong case that everyone should have some form of health insurance to protect against catastrophe. If you don’t have health insurance, that is step 1. Here is an article on how to compare health insurance plans.
Now that you know what an HSA is, here are the benefits provided by an Health Savings Account plans:
Lower Monthly Premium
HSA’s offer a lower monthly premium than comparable health insurance plans. This means you keep more money in your pocket every month. Ideally, you invest the money you save on premiums in your HSA where it can grow and compound.
Limitation of Liability
Like traditional plans, HSA’s limit your yearly medical expense to the out-of-pocket max. This is the maximum amount of money you can spend per year on medical care (in addition to your insurance premiums). For example, if your OOP max is $3,500, and you receive care worth $20k, you only owe $3,500. You are protecting 1) yourself from catastrophic injury and 2) your personal savings from being wiped out. For a low amount per month, this is both smart and good value.
Save for the Future
By contributing to your HSA, you are saving for future medical expenses. Instead of spending all of your money on premiums each month, you divert part to a savings account that you can tap should the need arise. This provides security and piece of mind if you are injured, become sick, need cash, or suffer a job loss. It is a form of tax-advantaged savings that adds up quickly. This money is yours to keep, invest and spend.
Reduce your Taxes
HSA contributions are unique in that they have a Triple Tax Advantage. Your contributions, earnings, and withdrawals all occur tax free. This allows you to reduce your taxable income, achieve better investment growth, and pay for medical expenses with tax free money. All of this keeps more money in your pocket.
One of my favorite attributes of HSA’s is that they can be invested in a manner very similar to a 401(k). While you can keep the HSA in a FDIC insured savings account, it can also be invested in stocks, bonds, ETF’s, etc. There is a definite risk / reward trade off here, but for one with a long time horizon, you have the ability to grow your HSA into a sizable nest egg. You can even use this for retirement.
The first step towards financial freedom is to establish an emergency fund, which is a savings account only used for emergencies (car breaks down, injury, home repair). This will rescue you in a time of need and prevents your finances from being knocked off track. Interestingly, an HSA can act as a backup emergency fund. If you elect to pay qualified medical expenses out of pocket (as opposed to with your HSA funds), you can reimburse yourself for those expenses in the future. Those reimbursements are a tax free draw of cash, from your HSA to your pocket. A full discussion of this maneuver is covered here.
If you ever find yourself unemployed, your HSA can help you tremendously. As mentioned, it serves as a backup emergency fund to withdraw cash for reimbursements. Additionally, you are allowed to pay for health insurance premiums during a spell of unemployment using your HSA (this is not allowed during times of employment). For example, if you have $1k in HSA savings and become unemployed, you can use those HSA savings to pay for your health insurance while unemployed. This is a great safety net as it ensures you do not open yourself up to unlimited financial liability should something happen.
Control your Spending
With traditional health insurance, each month you pay out money for a high premium that never comes back to you. By establishing an HSA, you can divert a large part of this amount to an account that remains yours forever. Instead of throwing money away, you are creating an asset that you can use however and whenever you like. It is much closer to ‘pay for what you use’ health insurance, which provides control. Additionally, you can spend your HSA on a wide variety of qualified medical expenses, all using tax free dollars.