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5 Smart Ways to Use Graduation Cash

May 11, 2018
Loans, Student Loans
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College graduation is cause for celebration. If you get a few hundred bucks from relatives for earning a college diploma, you’ve earned that wardrobe upgrade, new gadget or dream backpacking adventure.

Alternatively, you could use the money for something that’ll pay off longer-term, making life a little easier down the road. Here are five ways to start.

1. Save for emergencies

Things never turn out exactly as planned — car trouble, job layoffs and health issues happen to almost everyone. By having some cash ready for these unexpected events, you are more prepared to face whatever adulthood throws your way.

Experts recommend setting aside three to six months’ worth of living expenses, but that takes time. Aim to save just $500 to start and build from there. Keep it in a high-yield savings account so you’re not tempted to spend it, but it’s easily accessible if you need it.

2. Pay off credit cards

If you racked up college credit card debt, paying it off now will save you money in interest, boost your credit and give you a fresh start as you enter the “real world.” There are many strategies for getting out of debt. They include:

  • Paying more than the minimum amount due each month
  • Tackling the highest-interest debt first
  • Consolidating debt with a 0% balance transfer credit card or personal loan

3. Tackle student loan interest

Most student loans have a grace period, which means you’re not obligated to start making payments until six months after you leave school. But this isn’t a free pass — interest generally accrues while you’re in college and during the grace period. In other words, you likely owe more than you originally borrowed.

To save money on interest, make at least interest-only payments from now until your grace period ends, and use any extra cash to pay down the interest that has already accrued. Check your student loan account or use a student loan calculator to see how much interest you owe.

4. Seed a retirement account

Retirement feels impossibly far away when you’re just starting out, but the power of compound interest makes saving for it now one of the most efficient uses of cash. A 401(k) with an employer match is the best way to start saving. If you don’t have one,  open a Roth IRA and use some graduation money for your first contribution.

Not convinced? Let the math speak for itself: If you invest $500 in a retirement account at age 22 and don’t make additional contributions, you’ll have about $8,000 at age 62, assuming a 7% rate of return. If you did the same thing at age 32, you’d have only about $4,000.

5. Dip your toes into investing

Retirement is the ultimate long-term investment, but you may also want to invest for another goal, or simply to build wealth. Investing can seem intimidating, but you don’t have to be rich to start — you can invest just $500.

There are two main investment vehicles: Robo-advisors and online brokers. Robo-advisors are relatively affordable online services that use algorithms to manage and invest your money based on your risk tolerance and goals. They’re a good option if you want someone to do the work for you. If you want to be more hands-on and choose funds and individual stocks, use an online broker.

These five tips aren’t as Instagram-worthy as a trip to Europe, but using them will help you reach financial goals for the rest of your life.

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