The 7 new rules of financial security

Old thinking: Keep enough money in ultrasafe accounts to cover life's emergencies, but no more.
New rule: Relying more on cash can rescue you in an "asset emergency."

For most of your career you'll want to set aside about six months' worth of living expenses in the bank. That money covers the mortgage and puts food on the table should you lose your job. The fact that you'll earn only about 2% is beside the point. You can't take the risk.

The simultaneous crash in stocks and houses has taught us that we need to redefine "emergency."Rande Spiegelman, vice president of financial planning for the Schwab Center for Financial Research, recommends looking at the next one to three years and adding up any big-ticket stuff you see coming: tuition, a wedding, a down payment on a house. Once you have your total, aim to hold that much in a cash account or a low-risk investment such as a high-quality short-term bond fund.

What to do: It's not easy to build cash savings and a retirement fund at the same time. If you have to make choices, build up that emergency fund first because you can't expect to lean on your home equity or stocks if you lose your job. And see if you have some flexibility on the big-ticket obligations. Maybe you plan for a state school rather than a private college, or downsize the wedding. If all your assets are in a 401(k), move some of that balance to low-risk investment options as you build your cash funds. That will preserve more to tap via a 401(k) loan in a pinch. Not a terrific option, but it can beat the alternatives.

In the years just before and after retirement, cash becomes even more important. You don't want to sell stocks during a bear market to buy groceries. Aim for two to four years' worth of living expenses in low-risk assets as you near retirement.

NEXT: Rule No. 3: Human capital