You’ve recently graduated from college, and perhaps you received a gift or a signing bonus. You are ready to start your adult life off on strong footing, but you aren’t sure what the best choice is for this unexpected windfall. Here are a few ideas to help you think through your options.
1. Will you rent an apartment? You may need a security deposit. Many landlords require a security deposit equal to one month’s rent when you enter into a new rental contract. If you have roommates, divide the security deposit up equally between you.
2. It’s also a good idea to build up a small emergency fund in case your new job doesn’t work out or if you get sick and can’t work for a time. This emergency fund can help you cover your bills for a few months while you get back on your feet. Think of your emergency fund as the foundation of your financial house. If your financial foundation is weak, even a relatively small setback could knock you down.
3. Are you looking at buying your first car? You could use some of your extra money for a down payment. Be sure you hold back some cash to fund a savings account in case your car needs repairs. Remember, a new car depreciates (loses value) as soon as you drive it off the lot. In other words, if you put a few thousand dollars down on a new car, you could easily see that value wiped off the car’s resale value before you even buy your first tank of gas. Consider a used car.
4. Did you pass on getting a credit card while you were in college? You may find it’s harder now to get a credit card than it would have been when you were a student. If you need to start building a credit history because you do not have a credit card in your name, talk to your bank or credit union about getting a secured credit card. With a secured card, you deposit a set amount of money into a savings account. Typically, it’s about $500. Then your money remains in the savings account as a security deposit against your credit card. You use the credit card and pay it off each month to show the bank you are responsible. After a year of on-time payments and not charging more than your credit limit, you can typically apply for an unsecured card and get your cash back. If you decide you don’t want the secured card anymore, you can always close it and get your funds back.
5. For those who have received a lot of money (upwards of $10,000), or if all of these other ideas don’t really apply to you and you have earned income for the year, you might open and fund a Roth IRA.
You may be wondering, Why in the world would I start saving for retirement when I’ve only just started working? Fair question. I’ll touch on two crucial points you need to understand if you want to be a money-wise adult. First, saving for the future is a habit humans aren’t particularly good at. Get in the habit of saving now, and your life will be much easier down the road. Second, by starting your savings and investing now, you have more time to take advantage of the world’s most powerful wealth building tool: compound interest.
There are many ways to use the money you received from graduation or as a signing bonus. Some are wiser than others. Before you spend the money, spend some time thinking about what makes the most sense for you. Do you need a security deposit or downpayment on a used car? Are you moving out on your own and need to have cash set aside for emergencies? Are you able to invest some in a Roth IRA? A combination of these ideas may work best for you. Get started on the right financial foot now and enjoy a more secure life in the future.