How to Prepare for Unexpected Costs

A short guide to avoiding financial surprises.


Martin Coyne

Decorative, illustration of a person holding an enormous pencil in front of an enormous checklist labeled "Finances" | By Kyle Duong

In today’s complex financial world, preparing for unanticipated expenses is hard. Common examples can include out-of-pocket costs for a medical emergency or vehicle repairs. Add in the possibility of hikes in tenant or homeowner insurance rates and personal property taxes. This list could be longer, but you get the idea.

Even though there is no silver bullet we – or anyone – can offer to deal with unexpected costs, better budget planning for these costs could make life easier for you. Here are tips on savings, expenses, and income that may help you get started. 

Illustration by Kyle Duong

Increase Savings

  1. Consider an emergency fund: Creating a dedicated savings account for unexpected costs is a key part of better budget planning.   
  1. Identify unexpected costs on a yearly basis: Making a complete list of possible expenses could help take the surprise out of unanticipated costs. Take a look at your expenses from the past year (bank or credit card statements) and break them down into categories - expected and unexpected. 
  1. Total unexpected costs: Adding the unexpected costs identified in step 2 will help you arrive at your emergency fund’s yearly savings target. To determine how much might come out of each paycheck, divide the total for the emergency fund by the number of pay periods in a year. For example, a $3,000 emergency fund would receive 26 contributions of $115 if you’re paid every two weeks.  
  1. Build emergency savings through automatic transfers: Taking advantage of the automatic deposit feature in online banking will ensure a set amount of your paycheck is dedicated to emergency savings each month.  
  1. Not overdoing an emergency fund cushion: Including a small amount of additional money in an emergency fund may help your “rainy day” planning. This cushion shouldn’t sacrifice your other budgetary needs.  

Looking at the $3,000 example may lead you to ask: “Once I figure out the total unexpected costs for the next year, what’s next?” Consider two additional options that could brighten your budget outlook.

Illustration by Kyle Duong

Trim Expenses

  1. Subscriptions: Do you have a variety of subscriptions? Paring them down to one or two that you enjoy can substantially lower your monthly expenses. For example, consider cable OR a streaming movie service rather than both. For extra tight budgets, think about eliminating music and movie streaming services, even if only for a couple months, to see if that makes a difference. 
  1. Cell phones: The largest carriers can involve expensive service with unlimited data plans. Research shows that moving to a lower cost carrier or a prepaid cell phone can cut monthly charges by up to 50%. These lower cost options may provide talk, text, and Wi-Fi service at a level that suits your needs. If you pursue this option, you may need to factor in early contract termination fees. 
  1. Energy: Your power company may have tools to assess your home’s electricity consumption and suggest ways to lower your monthly bill. You can also check your eligibility for energy assistance. Under the Low Income Home Energy Assistance Program, the U.S. government works with states to help residents stay warm in winter and cool in summer (See: Virginia’s program).
  1. Insurance: If you’re trying to lower your monthly car insurance costs, it might be worth raising your deductibles on automobile collision and liability policies. That said, consider the higher cost for events like a car accident or health issue.
  1. Allowance: An allowance, even if it is only enough to purchase your favorite treat once a month, could be worthwhile. 

Reducing expenses can be difficult. However, it may be the perfect first step in creating monthly savings for unexpected, yet inevitable, costs. Cutting recurring expenses, rather than one-time costs, can provide you with valuable and sustainable savings.

If cutting expenses doesn’t get you enough savings to reach your emergency fund target, you may want to consider taking advantage of the gigging (think: Thumbtack, Rover, Instacart, etc). 

Millions of Americans participate in the gig economy each year, and roughly half of all U.S. gig economy workers are in it to create a secondary income. 

Illustration by Kyle Duong

Create a Secondary Income

  1. Choosing your gig economy side hustle wisely: The gig economy options for you may seem limitless. Uber Driver. Courier Service. Customer Service. Grocery Delivery. Dog Walker. Pet Sitter. Babysitter. Caregiver. Internet search results on the gig economy include these services and many more like them. A potential advantage for you is sticking with gig jobs that allow you to set your own hours. Many participants in the gig economy leverage their primary job skills.
  1. Ensuring timely and easy payment for gigs: If you decide to participate in the gig economy, you may want to take advantage of electronic payment options for speed and convenience. Besides direct deposit to your bank, apps such as Venmo or Zelle are increasingly popular.
  1. Planning for slow times: It is not unusual for slow periods to occur in the gig economy. If you participate, try to stack gigs so you have more than one secondary revenue stream. A backup plan could be any of the options mentioned in Tip 1 or other gigs such as Uber Eats or Door Dash.
  1. Building in down time: Through trimming expenses and building a modest secondary income, you may find that slow periods in the gig economy provide a needed break. If so, take that time for yourself or your family and enjoy it!
  1. Remembering tax time: Gig economy income, like income from any freelance project, is taxable. You can find more information at the Internal Revenue Service Gig Economy Tax Center.

If your budget is so tight that you can barely pay the bills, the concept of saving money might seem ridiculous. We all start somewhere, even at $5 a month. If you work at saving money, managing unexpected costs is doable. Reducing your expenses and increasing your income are good options to achieve your savings goals. Moving in that direction can be great for your peace of mind and motivate you to save more money in the future.