I use sqlite3 in memory database for testing. It's usually a little bit faster than file based, but not THAT much unless you have a ton of test data.
To set that up your database.yml will look like this:
test:
adapter: sqlite3
database: ":memory:"
You'll also have to load your schema into your in memory database in your test helper like so:
config = YAML::load(IO.read(File.dirname(__FILE__) + "/../config/database.yml"))
ActiveRecord::Base.logger = Logger.new(File.dirname(__FILE__) + "/../log/debug.log")
ActiveRecord::Base.establish_connection(config["test"])
load(File.dirname(__FILE__) + "/../db/schema.rb")