The term "dry powder" has several meanings in the financial world, referring metaphorically to financial reserves and (paradoxically) liquidity.

Often it is used in reference to an individual company's cash reserves. These cash reserves may be needed by the company to meet its obligations, particularly during difficult economic times, so the company may seek to build up its "dry powder" in anticipation of tough conditions ahead.

The term "dry powder" is used in reference to investors, too. In this case, "dry powder" still refers to cash reserves, but it also can include other liquid assets, such as money market funds that an investor may have set aside for investment purposes. Many financial advisors warn their clients against investing 100% in the stock market and encourage them to be prudent by maintaining plenty of dry powder. Dry powder of this kind comes in handy during periods of steep market decline, because you can fall back on these savings when needed. Moreover, it can be especially beneficial to the investor who chooses to buy stocks at substantially lower prices during such periods of decline.

The origins of the phrase hearken back to the 17th century, when military battles were fought with guns and cannons that used loose gunpowder. In order for it to remain effective, the gunpowder had to be kept dry – and having stores of dry powder on hand was important to keep weapons functioning. Hence, the equation of dry powder with reserves that can keep a company operating or an investor financially sound.

To learn how to create your own emergency savings, see "Build Yourself an Emergency Fund" and "Are You Living Too Close to the Edge?"

(This question was answered by Tony D'Altorio.)