Another part of the foundation is cash reserves, or liquid savings. Cash reserves must be readily available for unexpected emergencies, needs and opportunities. (Most experts advise putting aside three to six months' living expenses for emergencies -- however, this is largely a matter of personal preference.) The types of investments that meet our criteria for cash reserves feature safety, liquidity and yield. We are still on the bottom the pyramid, so safety must be great, and yields will generally be modest. Liquidity is essential for cash reserves -- it's the ability to get cash out of the investment on short notice with little or no penalty or loss. Two investments that meet these criteria are bank, savings accounts and money market funds.

For long term savings, use tax-deferred savings and retirement plans whenever possible. These plans feature substantial tax advantages and sometimes offer the additional bonus of matching contributions. Plans may be referred to by names such as 401(k), 403(b), pension, and profit sharing. Equally important are individual/self employment plans such IRAs, Keoghs and SEPS.

Another type of tax advantaged account is the tax-deferred annuity. These accounts, offered by insurance companies, provide a great degree of safety, attractive yields and substantial tax benefits. In addition, they offer the option of receiving income for life, no matter how long you live.