Where do I stash my emergency cash?

Dear Dollar Diva,
I have approximately $2,500 in a savings account that earns minimal interest. Generally, I don't touch this money unless I get in a bind. For instance, I pulled $500 out a few months back because I needed to pay a first- and last-month's rent when I moved. I want quick access to the money if I need it, but I'm wondering what I can do to make this money earn more than just a few dollars a month. I already have an investment account but no certificates of deposit or individual retirement accounts.
Brian

Dear Brian,
Take $100 out of your wallet and burn it. That's how much you're throwing away every year by keeping your money in a minimal-interest savings account. That being said, where do you stash your short-term cash? Here are three better choices for your emergency stash: taxable money market mutual funds, U.S. Series I bonds and certificates of deposit.

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Taxable money market mutual funds
You can think of them as low risk mutual funds. They're not 100 percent risk free, but they're safe enough. The Securities and Exchange Commission regulates these funds and limits the kinds of investments fund managers can make -- primarily U.S. Treasury issues, and other securities carrying the highest credit ratings.

You can get money market funds made up of U.S. government securities, but the cost in lost yield outweighs the benefit of the minuscule increase in safety.

You can also get tax-exempt money market funds, which only make sense if you are in a very high tax bracket or have very high state income-tax rates.

What should you look for when shopping for a fund?

Low management fees. You want to pay less than 1 percent.
An initial minimum deposit between $1,000 and $5,000 will probably be required. Find out if there's a penalty for letting the balance drop below the minimum initial deposit, or some other figure. The lower that figure, the better.
Watch out for fees for check-writing privileges or electronic transfers from the fund to your checking account. Avoid them.
What's the minimum check size? Expect it to be between $100 and $500.
Do you want a "sweep" account? You have an investment account now -- would you like to be able to "sweep" money in and out of this account when you buy and sell securities?
Expect a yield that is more than a short-term CD (three to six months) and less than a long-term CD or Series I bond.

You've got to shop around. Large, reputable financial institutions are your best bet. They are a good place to start.

Like any other mutual fund, you want to read the prospectus before you part with your money. Many investment companies will let you download prospectuses right from their Web sites. If you use an investment firm, talk to someone there or visit the company's Web site to see what it has to offer.

U.S. Series I bonds
The Diva likes them. Here's why:

They pay a very nice interest rate based on a fixed rate and an adjustment for inflation. The inflation portion of the interest adjusts every six months, based on the Consumer Price Index for all Urban Consumers. Visit the U.S. Treasury Department's Web site for current rates.
You can buy I bonds at face value in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. So you could buy five $500 I bonds with your $2,500 cash.
Most local banks sell them. They help you fill out the purchase order, and the bonds are mailed to you within three weeks. You can also buy them online.
Most local banks redeem them on the spot.
There is nothing safer than U.S. savings bonds.
You don't pay tax on the earnings until you cash in the bond.
The interest on savings bonds is exempt from state and local income taxes.
The interest is eligible for tax benefits when used for qualified education expenses.

We all know there is no free lunch in this world, so here are the very small down sides:

You must hold the bonds for six months before you can redeem them.
If you redeem the bonds during the first five years, there is a penalty equal to three months of interest. If you redeem a $500 bond early, and it's earning 5 percent a year, the penalty is $6.25. That's no biggie.

Certificates of deposit
CDs generally offer a higher return than savings accounts and bank money market accounts, but a lower rate than Series I bonds. They're insured by the Federal Deposit Insurance Corporation for $100,000 per bank.

Here's what you need to consider:

CD terms run from three months to about five years.
The minimum deposit for a short-term CD generally runs from $500 to $2,500, but can be higher or lower.
Rates and penalties for early distribution vary by institution.
You can make the terms work for you by buying a three-month, $500 CD each month until your $2,500 is used up. This will take five months. Within three months, you'll be on a schedule of a CD maturing every month.
Check Bankrate.com for up-to-the-minute rates on high-yielding CDs.
What's the worst thing that can happen? An emergency comes up and you have to redeem one early and pay an early withdrawal penalty. Not so bad.

You mention individual retirement accounts in your question, but it's not related. We're talking here about a safe, accessible place to put the cash you've accumulated for short-term needs. The Roth is a long-term, retirement instrument.

-- Updated: Nov. 20, 2002