An emergency fund may seem like just another task on your lengthy financial to-do list, so it’s tempting to move it to the back-burner and focus on more immediate responsibilities. However, not building an emergency fund can actually cost you more money in the long run.

If you don’t have an emergency fund and you incur an unexpected expense, you have a couple of options. First, you could charge the expense to your credit card or take out a loan to cover the cost. But if you don’t have the money now, chances are you may not have it in a month or two when it’s time to make your credit card payment or pay off your loan. And the longer it takes to pay off your debt, the more you’ll end up paying interest. By the time you’ve paid down your debt, you could potentially pay hundreds or even thousands of dollars just in interest payments.

For example, say you had to make an emergency trip to the hospital, and you’re slapped with a $1,000 bill, which you charged to your credit card. The interest on that credit card is 18%, and you’re making payments of $100 per month. At that rate, it would take about a year to pay off that debt, and you’d end up paying around $100 interest. If any more unexpected expenses pop up during that time, your debt will continue climbing, and you’ll pay even more interest. 

Another option when paying for unexpected expenses is to pull the money from your retirement fund. Especially if you only need a few hundred dollars, it may seem like that small amount wouldn’t make a dent in your savings. However, it can make a bigger difference than you’d think.

First, you might be charged a 10% penalty fee for withdrawing your retirement money before age 59 ½. Second, you may have to pay income taxes on the amount you withdraw, so your cash won’t go as far as you think. And third, when you withdraw any money from your retirement fund, it makes it harder for your savings to benefit from compounding growth – and even relatively small withdrawals can hurt your long-term savings.

For instance, say you have $10,000 in your retirement fund, and you withdraw $1,000 to cover an emergency expense. Let’s also say you were saving a $150 per month, which you continue doing even after you make your withdrawal, If you didn’t withdraw any of your savings, you’d have around $356,000 saved after 35 years, assuming you’re earning a 7% annual rate of return. But if you were to withdraw $1,000, you’d only have around $345,000 saved, all other factors remaining the same. In other words, a $1,000 withdrawal can ultimately result in lost potential earnings of more than $10,000 in the long run. And if you continuously withdraw from your retirement fund, it could cost you even more.