Having money set aside for a rainy day can help you prevent a financial catastrophe. Yet even when you're not getting much return on your emergency fund, you shouldn't take unnecessary risks with that money -- even if the temptation to do so is huge, like it is right now.

Lousy alternatives
I certainly won't dispute that having your money in cash nowadays is pretty much a no-win situation. Short-term Treasury bills earn less than 0.2% interest. Most money-market mutual funds pay no more than that. And even if you find a bank that's offering a high interest rate on a savings account, you'll be lucky to get 2% -- which probably won't be enough to keep up with inflation.

So when one financial expert advised putting your emergency cash to work in blue-chip stocks, I could definitely see the appeal. With solid companies like Procter & Gamble (NYSE: PG), Johnson & Johnson (NYSE: JNJ), and McDonald's (NYSE: MCD) all paying 3% or more in dividends, you'd get far more income from quarterly payouts than you would in interest on cash investments. Moreover, while that meager interest would be all you'd ever get from a bank or money-market account, those stocks could actually grow-- giving you additional gains.

As attractive as that idea sounds, however, there's one big problem: It undermines the entire purpose of having an emergency cash stash. When you want liquid, dependable funds available at a moment's notice for any purpose under any conditions, only a money-market fund or savings account really gives you the access you need.

When disaster strikes
Small personal financial crises come up all the time. An air-conditioner repair or an unanticipated car problem adds an extra few hundred dollars to an already overstretched budget. With relatively minor items like that, you can afford to take somerisk with your emergency funds, and using alternatives like taking on credit-card debt for an extremely short period of time won't hurt you too badly.

But it's the major financial problems, such as losing your jobor incurring huge medical bills, that require the full resources of your emergency fund. And while there's no absolute correlation between your own personal situation and the overall economy, you're more likely to lose your job when the economy is bad-- and that's often a time when the stock market will be down, making it a terrible time to have to liquidate even blue-chip stocks to raise emergency cash.

The blue-chip blues
The other big challenge with using stocks for an emergency fund is deciding which companies are actually low-risk blue chips. A few years ago, you might well have thought the financial institutions below belonged on your list of blue-chip dividend-paying stocks. You might never have thought they'd ever see a big decline. Yet look at what happened:

Stock

Current Dividend Yield

3-Year Total Return

Citigroup (NYSE: C)

N/A

(90%)

General Electric (NYSE: GE)

2.4%

(45%)

AIG (NYSE: AIG) Continued...