Do You Need $20,000 in Savings? Here's How to Find Out

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If you have $20,000 in savings, congratulations! According to an Empower study, about 40% of Americans don't have $400 in their savings accounts , so you're well ahead of the curve.

Many financial advisers suggest having three to six months' worth of emergency savings. The exact amount depends on your lifestyle, dependents, and other factors. Rather than picking a number like $20,000 out of the air, look at your financial situation and work out what's right for you.

If you're single and get by on $2,000 a month, your ideal savings number will be very different from someone who's the main breadwinner in a family that spends over $5,000 a month.

Here's how to work out what you need in savings

Savings are an important safety net. Having cash in the bank can help you handle life's curveballs -- from an unexpected medical bill to a job loss. But it's about more than having a cushion (even if it's a very special cushion in a high-yield account that's currently paying an annual percentage yield (APY) of 4% or 5%).

When you have a good amount of savings, it gives you more freedom to take risks. That might be switching to a new career or having the confidence to leave a job that's making you unhappy. Here are two questions to consider when working out how much you need.

1. What are my monthly expenses?

If you don't already have a good idea of what you spend each month, sit down and look at your expenses. You can use a budgeting app , a spreadsheet, or an old-fashioned pen and paper.

Common costs to consider include:

• Rent or mortgage
• Utility bills
• Cellphone and other regular bills
• Insurance (health, home, car, etc)
• Debt payments
• Transport costs
• Groceries

Use this figure as a base to explore different scenarios. Think about what costs you might be able to cut and what might be the absolute minimum you'd need to get by.

Let's say disaster strikes and you lose your job tomorrow. How long might it take you to find a new one? And what money will you have coming in in the meantime? For example, if you have a side hustle or a partner who also brings in a salary, factor that into your calculations.

2. How many months' worth of money do I need?

The next big question is how many months' worth of money you want to save. Some people are comfortable having three months' of cash, while others aim for a whole year's worth of money. If you have dependents and a large mortgage, you may need a bigger safety net -- especially if you're the main earner in your household.

If you're confident you could find other work quickly or already have several sources of passive income, a few months of cash may work. That said, think about worst-case scenarios. If you encounter serious medical issues and physically can't work, your cash flow might take longer to recover.

This isn't about doom-mongering. Ultimately, if things go wrong, your savings could mean you don't have to take on debt to stay afloat. Plus, if you have money invested, your emergency fund will mean you're not forced to sell those wealth-building assets (potentially at a loss) to keep up with essential bills.

What if I'm nowhere near my emergency savings goal?

To figure out your ideal savings goal, multiply your monthly costs by the number of months you'll need. If your expenses are around $4,000 a month and you want five months' security, $20,000 would be your target. If you're not there yet, don't panic.

Whether you want $5,000 or $30,000, it can take time to build savings. But everybody has to start somewhere.

Look at your expenses again and work out what you can reasonably cut. Maybe there are some subscriptions you're not using, you could skip a couple of takeout meals per month, or you can shave 5% off your utility bills. Don't think too much about that big, scary number. Instead focus on an achievable monthly (or weekly) savings goal. If you can save even $100 a month, you'll reach $1,200 within a year.

Once you've got an achievable savings goal, consider automating it. The idea is to remove barriers and make saving frictionless. If your bank automatically moves money over from your checking account , you don't have to remember to do it. Put your savings into an accessible account that pays a competitive APY.

Don't stop there. If, after six months, you're comfortably meeting your savings goals, try to increase the amount slightly. And if you get any extra cash, put that into your emergency fund as well.

Keep it manageable

Having money in a savings account is an important financial foundation. If you're able to work toward a $20,000 emergency fund, that's fantastic. If you're living paycheck to paycheck and that number seems overwhelming, that's OK, too.

Start by saving a small amount each month and celebrating your progress when you reach certain milestones. Emergency savings should help you sleep better at night and not act as another financial boogeyman that add to your worries.

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