Latest / The Emergency Fund Podcast with Fexingo: Cash Reserves, Saving, and Financial Cushion / Why Your Emergency Fund Should Cover Your Insurance Deductible
Transcript
- Lucas: So here's a question I don't think we've ever asked on this show: what's the single biggest unplanned expense the average person actually faces in a given year? Luna: I'd guess car repair? Or maybe a medical bill? Lucas: Medical bill wins hands down. The Kaiser Family Foundation has been tracking this — the average individual deductible for an employer-based health plan in 2026 is just over $1,900. But for people on high-deductible health plans, which are about 30 percent of covered workers now, the average deductible is over $2,800. And for individuals buying their own insurance on the marketplace, plans with deductibles north of $6,000 are common. That's a real number. Luna: So if someone has a $6,000 deductible and zero in savings, they're one bad fall or one ER visit away from credit card debt. Lucas: Exactly. And that's before we even talk about losing a job. The classic emergency fund rule — three to six months of expenses — is great for income disruption. But for a lot of people, especially those with stable jobs, the more immediate threat is a large deductible-sized hit. So I want to make a case today for anchoring your emergency fund to your largest insurance deductible instead. Luna: Interesting. So instead of saying 'save $15,000 for six months of living expenses,' you'd say 'save $6,000 because that's your health deductible'? Lucas: Right. And the argument is: if you have $6,000 in cash that's specifically earmarked for a deductible event, you've covered the most likely financial emergency. And if you also have a stable job with a decent income, you probably don't need a full six-month buffer. You can handle smaller shocks out of cash flow. The deductible is the one thing that can really crater you. Luna: I want to push back a little though. What about job loss? That's the classic reason for an emergency fund. A deductible fund doesn't help if you lose your income. Lucas: Fair point. But think about the math. If you lose your job, you're probably eligible for unemployment benefits — which won't cover everything but can soften the blow. And you'd likely qualify for COBRA or a marketplace plan with subsidies. So the deductible risk actually changes. Meanwhile, the medical deductible is a known, fixed number that you can plan for. For many people, the probability of a $6,000 health event in a given year is higher than the probability of job loss. It's about matching your savings to the most probable risk. Luna: So you're not saying ignore the income disruption risk entirely. You're saying prioritize the deductible as the first layer. Lucas: Exactly. Think of it as a deductible-first emergency fund. Once you have that deductible amount in cash, you can then decide if you want to build beyond that for income replacement. But too many people never start saving because the six-month target feels overwhelming. A deductible target is smaller, more concrete, and more actionable. Luna: And it also avoids the trap of keeping too much cash earning zero or near-zero interest. Lucas: Right. If your deductible is $3,000, you don't need $20,000 in a savings account earning two percent. You can invest the rest. But that's a whole other episode. For today, I want to focus on how you actually calculate your deductible anchor. Luna: Walk us through it. Lucas: Step one: list all your insurance policies — health, auto, homeowners or renters, and any other major coverage. Step two: identify the highest deductible among them. For most people, that's health insurance. But if you have an older car and you chose a $2,000 deductible on auto, that could be the biggest. Step three: that number is your initial emergency fund target. Not three months of rent, not a percentage of income. That specific dollar amount. Luna: What about people with high-deductible health plans who also have a Health Savings Account? Doesn't the HSA already serve as a kind of emergency fund? Lucas: Great point. An HSA is actually the perfect complement to this strategy. If you have an HDHP, you can contribute pre-tax dollars to an HSA, invest them, and use them tax-free for qualified medical expenses — including your deductible. So if you have, say, $4,000 in your HSA, that's effectively your medical deductible fund already. And you might not need a separate cash emergency fund for that specific risk. But remember, HSAs can only be used for medical expenses without penalty. So if your emergency is a car repair or a roof leak, the HSA won't help. That's where a separate cash fund comes in. Luna: So the deductible-first approach works best when you pair it with an HSA for health, and then you have a smaller cash fund for non-medical deductibles. Lucas: Exactly. And for many people, the non-medical deductibles are much smaller. Your auto deductible might be $500 or $1,000. Your homeowners deductible might be $1,000 or $2,500. So the total cash needed for all deductibles could be far less than three months of expenses. That's a much easier goal to hit. Luna: I can see this being especially helpful for younger people just starting out. They often have low expenses but also low savings. Telling them to save $15,000 is paralyzing. Telling them to save $3,000 is achievable. Lucas: And once they hit that $3,000, they've built the habit. They're more likely to keep going. It's a behavioral hack as much as a financial one. Luna: Alright, I want to test this against a real scenario. Let's say I'm 30, single, renting, with a $4,000 health deductible, a $1,000 auto deductible, and $500 renters deductible. Total: $5,500. I have $5,500 in a high-yield savings account earning 4 percent. Then I lose my job. What happens? Lucas: That's the question. If you lose your job, you likely have other expenses — rent, food, utilities. Your $5,500 won't cover six months of that. But it will cover your health deductible if you need to go on COBRA or a new plan. And you'd have unemployment benefits. The real risk is that you deplete the fund for living expenses and then have nothing left for a deductible. So the deductible-first fund is not a complete solution for income loss. It's a first step. But it's better than having zero savings at all, which is where many people start. Luna: So you'd still recommend that people eventually build beyond the deductible, but start there. Lucas: Yes. And the beauty is, once you have the deductible fund, you can start adding to it for income replacement. But the psychological win is huge. You've crossed the first finish line. Luna: Let's talk about where to keep this money. Since it's for a known, potentially large expense that could happen at any time, you probably want it liquid and safe. Lucas: Absolutely. High-yield savings account, money market account, or a short-term Treasury ETF. You want no volatility and immediate access. The goal is to have the cash when the deductible hits, not to earn a high return. The return is the peace of mind. Luna: And if you never have a deductible event? That money just sits there? Lucas: It's not wasted. It's insurance. You don't complain about paying car insurance when you don't get in an accident. The money is there for when you need it. And if you go years without a claim, you've still had the security. Plus, you can always decide later to redirect it to another goal. But the moment you spend it, you lose the protection. Luna: So the recommendation: look at your largest deductible, save that amount in a liquid account, and then — if you can — build from there toward a fuller emergency fund. Lucas: Exactly. And if today's conversation helped you think about that differently, we'll put a link where you can show your support. It's buy me a coffee dot com slash fexingo. No pressure, but if it was worth a coffee to you, that's the spot. Luna: And we genuinely mean that. This show stays ad-free because listeners like you chip in. So thank you. Lucas: Alright, back to the numbers. Let's talk about how to figure out your own deductible anchor if you have multiple policies. The key is to look at the maximum out-of-pocket for your health plan, not just the deductible. Some plans have a deductible of $3,000 but an out-of-pocket max of $8,000. Which number should you save for? Luna: I'd say the out-of-pocket max, because that's the worst case. Lucas: That's a valid choice. But the deductible is the amount you'll pay for most routine events — a surgery, an ER visit, a hospital stay. The out-of-pocket max only kicks in if you have catastrophic or ongoing care. For most people, the deductible is the more likely figure. But if you have a chronic condition or a planned procedure, then the out-of-pocket max makes sense. It's a judgment call. Luna: So the framework is flexible. You can adjust it based on your personal health situation. Lucas: Right. And that's the advantage of this approach over a blanket 'three months of expenses' rule. It's personalized. It's based on your actual risk profile. And it gives you a clear, finite target to aim for. Luna: I like it. I think a lot of our listeners will find this more motivating than the standard advice. Lucas: Let's hope so. Because the biggest enemy of an emergency fund isn't the wrong target — it's not starting at all. A deductible-first fund gets you started. Luna: And once you have that, you're already ahead of most people. Lucas: That's the takeaway. Thanks for hanging with us today. We'll be back next time with another angle on cash reserves.