Spend or save graduation money? How new grads can decide

When it comes to graduation gifts, cash is king.

Spending on graduation gifts for high school and college students reached $5.2 billion in 2018, according to the National Retail Federation. That’s the third highest number since 2007 following the record $5.6 billion in 2017. Of all the gifters, about 55 percent are handing over cash to recent graduates. For those completing their college education, this can be a particular boon.

“Receiving cash for graduation is a great gift and, when used wisely, can really help newly-minted college grads head into the real world with a step in the right financial direction,” says Andrea Woroch, a consumer and money-saving expert and author of Smart Consumer Blog.

Collecting cash gifts can feel like a major windfall (and victory) for grads leaving campus with their diploma, but it also triggers a question: Should you spend or save graduation money?

While you could go on a shopping spree, buy a car or treat yourself to a vacation, there may be some better ways to use your graduation money. Here are five smart ways to spend your graduation money that could put you at the head of the class financially:

1. Kick-start your emergency fund

Deciding whether to spend or save graduation money may be a no-brainer if you don’t have any emergency savings, says Phil Risher, founder of Young Adult Survival Guide, a personal finance blog for, yup, young adults. He believes building an emergency fund should take priority over other ways to use your graduation money.

“First and most important is to get a rainy day fund of at least $1,000,” Risher says.

According to him, keeping this minimum amount in the bank can help you navigate minor financial hiccups, like your car breaking down or an unexpected job loss, so you don’t panic or rack up debt when things don’t go as planned. Using a credit card to cover an emergency may seem convenient, but it can be expensive in the long run if your card has a high interest rate.

Once you’ve begun building an emergency fund, Risher says you can consider other ways to use your graduation money, such as paying down your student loans (see tip 2 for more). But don’t put emergency savings completely on the back burner. Having $1,000 tucked away is a good start, but you should aim for eventually having at least three to six months’ worth of expenses in an emergency fund.

Not sure where to put your emergency savings? Consider parking them in an online savings account, which may offer a more competitive interest rate on your savings and fewer fees compared to a savings account offered by a traditional brick-and-mortar bank.

2. Pay down some of your student loan debt

One option for how to use graduation money is to apply it to your debt if you took out student loans to pay for school.

Nate Matherson, co-founder and CEO of LendEDU, an online marketplace for student loans, says graduates should be strategic about paying down student loan debt with cash gifts.

“Grads should pay down their highest interest student loans first,” Matherson says. He noted that private student loans and federal loans for graduate school generally have the highest rates.

He says if grads have both subsidized and unsubsidized loans, they should consider using cash gifts to make a dent in the unsubsidized loans first. With subsidized loans, the federal government pays interest for the loan during periods of deferment or forbearance, or during the six-month grace period after graduation. This is the initial window of time before your first payment is due. With unsubsidized loans, the government doesn’t pay anything toward the interest on your behalf.

By pre-paying these loans as a way to use your graduation money, students could save themselves from accumulating interest on interest down the road. Otherwise, once your regular payments begin, you would be paying interest on both the principal and the interest that accrued during the grace period.

3. Get a jump on saving for retirement

Retirement? After just graduating college? While it may not be on your radar with other post-school priorities, it’s never too early to start planning for your golden years.

“As hard as it may be to contribute to retirement savings while paying off student loans or other debt, your future self will thank you for doing so,” says Kevin Gallegos, vice president of new client enrollment for Freedom Financial Network, an online financial services and education platform.

Gallegos, who also oversees Freedom’s operations in Phoenix, says starting with your employer’s retirement plan, if that’s an option, or opening an individual retirement account (IRA) are smart ways to spend your graduation money.

Once you’ve started to contribute to your retirement as a smart way to spend your graduation money, Gallegos says to get in the habit of saving at least 10 percent of your income for retirement annually. Even if you were to save just $100 per month in a Roth IRA from age 25 to age 65 and earn a 7 percent annual return, you’d have more than $239,000 set aside for retirement, according to Calculator.net’s Roth IRA Calculator. If you were to instead make the maximum annual contribution in this scenario, which is $6,000 for 2019, your savings would top $1.1 million, according to the Calculator.net calculator.

4. Start your home down payment fund

If you want to become a homeowner someday, you might be wondering how to use graduation money to reach your goal. Using it to lay the foundation for a down payment is a step in the right direction. If you’re excited about the prospect of owning your own place, Gallegos recommends budgeting for your down payment now as a way to use your graduation money.

“Good budgeting starts not with dollars and cents, but with goals,” he says.

First, consider your time frame for saving your down payment. If your goal is to save $40,000 so you can buy a home in five years and you have $5,000 in graduation money to start your savings, for example, you would need to sock away $7,000 a year to reach your target.

Next, look at your current spending to see how much money you have in your budget to save. Reduce or eliminate where you can so you have more money to add to your down payment fund. And don’t forget to update your spending plan regularly. This, says Gallegos, can help ensure that any new expenses you take on don’t derail your budget or your long-term goal of homeownership.

When you’re considering how to use graduation money, similar to your emergency fund, you need to think carefully about where you put your down payment savings. A certificate of deposit (CD) may offer a better interest rate than a regular savings account. Alternately, a money market account could give you a great interest rate, along with easy access to your money via ATM, debit card or checks.*

5. Make a move

Moving to a new city post-college doesn’t always come cheap. If you’re debating whether to spend or save graduation money, know that cash gifts can save the day—and your budget. Woroch, of the Smart Consumer Blog, says the money from graduation gifts can come in handy if you need to pay moving expenses for a new job.

Some smart ways to spend your graduation money for a move include renting a moving truck or hiring professional movers, paying your security or utility deposits at your new place or buying furniture and other household items that you need.

She says there are also ways to use your graduation money to launch your career. For instance, you could use the money to pick up the tab for job search expenses, like professionally printed resumes. Or, you could use your graduation money to buy new business attire for interviews.

Planning how to use graduation money is key

If you’re not sure whether to spend or save graduation money, it helps to look at the big picture. For example, your short-term needs may include an emergency fund, while buying a home or creating a comfortable retirement nest egg may be part of your long-term financial goals. The answer to how to use graduation money is different for everyone, but by weighing all of the options, it may be easier to decide how to use cash gifts to brighten your financial future.

* Federal law limits certain types of withdrawals and transfers from savings and money market accounts to a combined total of 6 per calendar month per account. There are no limits on ATM withdrawals or official checks mailed to you. To get an account with an unlimited number of transactions, consider opening a Discover Cashback Debit account. If you go over these limitations on more than an occasional basis, your account may be closed. See Section 11 of the Deposit Account Agreement for more details.