What Does Out of Pocket Mean in Finance?

“Out of pocket” refers to money an individual or entity pays directly from their own funds. This direct payment occurs rather than costs being covered or reimbursed by a third party, such as an insurance company, an employer, or a government program. The concept applies across various financial situations, indicating an immediate expenditure of personal resources.

In Healthcare Settings

In healthcare, out-of-pocket costs represent the portion of medical expenses an insured person pays directly for services, prescription drugs, or other health-related items. These amounts are not covered by the health insurance plan until certain conditions are met. Common types of out-of-pocket healthcare costs include deductibles, copayments, and coinsurance.

A deductible is a predetermined amount a policyholder must pay for covered medical services before their insurance plan begins to pay. After the deductible is met, coinsurance often applies, which is a percentage of the medical bill you are responsible for, with the insurer paying the rest. A typical coinsurance rate might be 20%, meaning you pay 20% of the cost, and your insurer pays 80%.

Copayments, or copays, are fixed amounts paid for certain services, like doctor visits or prescription refills, at the time of service, and these may or may not count towards your deductible. For instance, a routine doctor’s visit might have a copay between $15 and $25, while an emergency room visit could be $200-$300. An out-of-pocket maximum is a limit, capping the total amount an individual or family pays for covered healthcare services in a plan year. Once this maximum is reached, the health plan covers 100% of additional covered in-network costs for the remainder of the year. For 2025, the out-of-pocket maximums for Marketplace plans are capped at $9,200 for individuals and $18,400 for families.

In Personal Finance

In personal finance, “out of pocket” refers to any expense an individual pays directly from their own funds for goods, services, or unexpected costs, without expectation of reimbursement from a third party. This encompasses a broad range of everyday spending that is part of managing a personal budget. These expenses are distinct from healthcare costs or business-related outlays.

Examples include daily living costs such as groceries, entertainment, and transportation, which are covered by an individual’s regular income. It also applies to unexpected personal expenses, like car repairs, home maintenance, or appliance replacements, where the individual bears the full cost. These direct payments are fundamental to personal budgeting, as they represent the actual cash needed to maintain one’s lifestyle and address unforeseen financial needs.

For Businesses and Employees

For businesses and employees, “out of pocket” typically describes costs incurred by an employee or business owner using personal funds for activities related to the business. These expenses may later be eligible for reimbursement by the company, depending on established policies. Such payments often occur when an employee is traveling, entertaining clients, or purchasing supplies away from the main office.

Common examples include travel expenses for business trips, such as meals, lodging, and transportation, or even small purchases like office supplies. For instance, if an employee uses their personal vehicle for business, they might pay for gas and tolls out of pocket, expecting reimbursement based on the IRS standard mileage rate, which is 70 cents per mile for business purposes in 2025. Whether these expenses are reimbursed and how they are treated for tax purposes depends on the employer’s reimbursement plan. An “accountable plan” requires employees to substantiate expenses and return any excess reimbursement, allowing the reimbursements to be excluded from the employee’s gross income. Conversely, under a “non-accountable plan,” reimbursements are generally included in an employee’s taxable wages.