Question: My wife and I are trying to figure out where to put $7,000 just sitting in our savings account. My wife is in graduate school and has both a subsidized and non-subsidized federal loan. We have about 5 months of my take home salary in “savings” (Roth IRA, Mutual Funds, and savings account) – I’d like to have 9 months. Finally we would like to save for a down payment for a home. My question is where should I put the $5,000? Roth IRA? Mutual fund for the house down payment? Or should we just pay down my wife’s unsubsidized loan? Thank you! Mark, Wellesley, MA

Answer: Well, you really can’t go wrong with any of the options you’ve mentioned. However, it’s unclear how the $7,000 fits into your 6 to 9 month savings fund. For many folks 6 months of salary in savings is good enough. But there’s nothing wrong with having a bigger cushion. It just gives you a larger margin of safety if something goes wrong.

So, if the $7,000 is your 6-month cash cushion I would stick with safe savings that you can get to easily. I don’t think there is anything wrong with simply letting the money “sit” in your savings account or, better yet, in a similar safe investment that might make you a bit more money, such as short-term Treasury bills. (And if interest rates go up the increase will show up right away in T-bills.) You’ll only earn a fraction in interest, but you won’t lose anything either. It’s safe money.

If the $7,000 is in addition to your emergency savings one way to think this through is to ask: Will there be expenses associated with your wife making the transition from graduate school to career? Will you move for the job? Will she need a new wardrobe or a car? If the answer is yes to these questions, I would also stick with safe savings. The money will be there when you need it to pay for her transition to a new job and, in the meantime, shore up your pool of emergency savings. Over a longer period of time, if it turns out you don’t need as much as you thought it can go toward a home or paying off student loans when you’re a full-time two-income couple again.

Again, let’s assume that you really don’t need the money in the short-run and that the money isn’t part of your 6 months savings cushion. In that case an attractive choice may be a Roth-IRA. When you withdraw the money in retirement the gain is tax free.

Here’s the thing: If you suddenly realize a year or so from now that you guessed wrong and you do need some of the money you can withdraw contributions penalty-free and tax-free from the Roth. In other words, a Roth is a long-term savings plan but it offers you the option of treating it as part of your emergency savings fund, too.

The maximum contribution into a Roth for the 2009 tax year is $5,000. So you would still have $2,000 left over. I would put some of the the Roth money into safer investment choices so that you don’t risk losing money on your investments if you have to suddenly withdraw money.

So, I vote for sticking with safe savings or going with the Roth.

Does anyone else have additional thoughts or ideas? I’d love to hear them. Thanks