Finally, it’s official: After years of studying, sacrificing and possibly incurring student debt, your kid has (finally!) graduated from college. In honor of this milestone, you’ve organized a party for your new grad. Most of the presents are graduation gift money with the exception of the gift from his new favorite relative, who couldn’t make the get-together. He sends a card along saying as an alternative to money, he’s going to pay your kid’s cable bill for the next year.
As a parent, what advice should you give to your new graduate for what to do with all this money? Chances are, after four years of higher education, your child wants to reward him or herself by purchasing something special. However, it’s wise not to spend it all on one luxury item. While there’s nothing wrong with a reward, say a new TV, a computer or a vacation, why not take some of the money and put it to work for the future? Here are some tips you can pass along for saving money and making investments:
Pay Off Debt
It’s no secret that a college diploma is expensive. Two-thirds of graduates take out loans, with the average American student’s debt topping more than $23,000. Using graduation money to pay off some portion of college loans or credit card debts may be the smartest way for a new grad to celebrate their newfound independence.
They’re probably not going to buy a house fresh out of college, but investing in and maintaining a reliable vehicle is a possibility. Although public transportation is an option in some major metropolitan areas, still nearly 80 percent of Americans drive to work. If your graduate puts money aside to buy a car or keep it in good working shape, then they could be making an investment with huge dividends if they do secure a job requiring a car to commute to work.
Save for the Future
If investing graduation money is an option, your son or daughter will need to have a financial plan in mind. In other words, you should help them do some research before making a decision that could tie up their money or cause them to lose a good percentage of it to penalties or depreciation. There are numerous investment ideas to choose from. Traditional forms of savings, such as Treasury Bonds and Individual Retirement Accounts (IRAs), may not give them the yield or freedom to access their money that they’d like. And blindly investing in the stock market can be a dangerous game if you (or they) don’t know what they’re doing.
While opening a mutual fund with an investment company used to require an initial investment of several thousand dollars, today several fund companies in pursuit of younger investors have decreased their initial investment minimum to $1,000. Don’t be afraid to ask for financial advice from a bank or employer if it’s offered. Listen to the professionals and then help your son or daughter decide how they want to save.
Chances are, they’ve just finished up classes and have only recently begun interviewing for their first big job, so a retirement plan is probably the farthest thing from their mind. However, it’s never too early to start planning. According to Gallup’s Annual Economy and Personal Finance survey, workers in the 1990s expected to retire at 60. Today, most workers don’t expect to retire until they’re 67. If your new grad wants to retire at any age, they’re going to need a retirement plan they can count on.
Once they’ve landed a job, they should consider putting some of their salary—and even graduation money—into an employer sponsored 401(k), or open their own IRA. Though retirement may seem like a distant dream, help them talk to their (your) tax preparer to find out how much sense it makes to begin putting some pre-tax money aside. You’ll both be one step closer to the golf green of your retirement dreams.
How your fully-grown children use, save or invest graduation money can have a positive impact on post-college life. Whether it’s paying off student loans, saving for a car or opening a mutual fund, help your son or daughter choose the option with a payoff that fits their foreseeable future.