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It’s graduation season, and I have a new college graduate at home myself. With graduation comes that flood of graduation gifts – mostly money. So once the thank you notes are written it’s time to get down to what to do with all of the loot.
If your son or daughter is a new high school graduate bound for college, make sure that you have already set some ground rules for funding his or her education. Who is paying for what? Have you committed to paying tuition, room and board, and books? Have you decided to split certain expenses with your college student responsible for certain costs. We assigned the cost of books and supplies to our daughter for the four years, but agreed to pay things in addition to tuition and her room and board such as sorority dues as well as covering the cost of certain academic memberships, gas, and car insurance. Certainly some of the graduation money should be spent on college expenses, particularly entertainment and other discretionary expenses to help teach your child some financial management. Our daughter eventually found it necessary to get a campus job to maintain the social life she wanted at college.
In the case of the college graduate, employment or post-graduate plans are key. If a new college graduate is moving into the job world, any student loans will soon come due. Helping a new graduate manage the expenses of a new apartment, food, utilities and other expenses will be a good use of your time. Setting up the new living arrangements is a good use of the graduation funds, especially to avoid any credit card debt. I was amazed as my daughter approached college graduation at the number of credit card solicitations that she began receiving in the mail. Credit card debt is a trap to be avoided.
For the high school graduate, career plans, post-graduate educational goals, and eventual living arrangements are things to be talking about with your young adult. Certainly managing the undergraduate degree in four years keeps tuition down, but also making sure that the level of student loan debt is manageable and correlated with career plans is key as well. No offense to school teachers, but a degree in elementary education is not compatible with fifty thousand dollars in private student loan debt. The starting salary will not cover hundreds of dollars of student loan payments per month in addition to starting a post-graduate household. And extending the pursuit of an undergraduate degree beyond four years might not be commensurate with parents looking at planning for retirement. Make sure you and your young adult are on the same page. Some of that graduation money should be used for educational purposes to keep debt levels under control and, if possible, a large portion of the money should be saved for future needs. Many students travel abroad, for example. Some programs are incorporated into college tuition plans, but often expenses like travel can be onerous in these programs.
For new college graduates, some of the graduation money should be used to pay off smaller student loans. In this interest rate environment, it is unlikely for a saver to get a good return on money if it is simply put into savings or even in a CD. Rather, student loans, and especially private student loans, are at interest rates that are quite high relative to the Prime rate and rates for new and used cars, for example. Pay off any student loan at rates of interest that are above the Prime rate if possible and reap the equivalent return. Reducing or eliminating a monthly payment can help a new household’s cash flow. as well.
Finally, make sure that your new graduate has the basics of financial literacy. The lessons of money in their pocket can be learned, but learned the hard way. Try to keep the new graduate from going on a spending spree. Make sure that your young adult has a bank account (and if going away to college, research the banks/credit unions available to the student on campus and fees that may be incurred by using his or her hometown account) including access to checking and/or electronic bill payment, access to cash (usually through an ATM), and make sure that your child has emergency money.
In the case of the college graduate, he or she should be quickly establishing savings of at least 3 months of monthly salary and beginning to establish a retirement account. In the case of the high school graduate, a small stash of emergency money perhaps left at a hometown financial institution so it is a bit difficult to access on a whim, is a good discipline. Make sure to talk to your young graduate about the dangers of credit cards and debt. Help establish the discipline to spend only what can be paid in full each month and go through the math of purchases that are repaid over time at the credit card’s interest rate. You know your son or daughter so before co-signing any credit card, make sure the ground rules are set. Co-signing ultimately saddles the parent with the responsibility for the debt. We found however that our daughter needed a credit card while on campus for unexpected car repairs and to purchase books on-line, for example. Yes, she did spend money on clothes and did use her credit card for these kinds of expenses, but being presented with the expense when it comes on your card statement allows you to teach and re-teach the lessons of spending beyond their means.
Graduation is a time of new beginnings. The cash gifts also present an opportunity for teaching our young adults something about financial literacy and management. Do not pass on the opportunity.
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