You need cash and liquidity for freedom and security. The cash in reserve provides money for not only emergencies but opportunities as well.

Cash reserves are usually tiered. Depending on how much you have in reserve, you should tier your cash as well.

The first tier is the cash you have around the house and in you wallet.

The second tier is the cash you have at the bank in you checking account.

The third and forth tiers can be a little less liquid but earning a rate of return. Money market accounts are safe and liquid. For those of you in higher tax brackets, tax-free funds might exceed the return of non tax-free funds. Some tax-free funds are exempt not only Federally but from the state tax as well (as long as you are a resident). (Keep in mind interest rate risk on municipals).

A cash reserve provides the foundation for your entire financial position. You should get your cash reserve in order before taking on any risky investments with money you can not afford to lose; boring but prudent.