7 Ways to Use Graduation Gifts To Get Out of Debt, Start Saving
Gifts of money can give grads a leg up on financial life with tips from Bills.com
SAN MATEO, Calif., May 27, 2009 — Millions of new high school and college graduates will receive cash graduation gifts this spring — and free online consumer portal Bills.com has seven suggestions for how grads can use that money to get out of debt, build savings and create a smart start to their financial life.
"Show that you are more than just book smart by using gifts wisely," suggested Ethan Ewing, president of free online consumer portal Bills.com.
For the last two years, the average graduation gift has cost about $50, and cash or gift cards were the most commonly given gifts.1 A graduate who receives 10 gifts will start the summer $500 wealthier. Ewing suggested seven uses for monetary graduation gifts that will help put any graduate on sound footing for their future:
- Save cash gifts. Don't blow gift money on a night out or a new outfit. "If the gift is burning a hole in your pocket, allow yourself to spend about 10 percent frivolously," Ewing said. "Put the rest in the bank or allow a trusted adult to hold it for you until the urge to spend fades."
- Barter. For most new graduates, cash is most helpful. Look into trading unneeded gift cards for cash. "If your parents are about to refurnish their bedroom, for instance, they might be willing to buy a home store card from you," said Ewing.
- Pay off debt. The average college student has credit card debt of more than $3,000.2 Paying $500 toward that debt would eliminate one-sixth of the balance. More importantly, a lump payment would leverage the $500 gift into savings of more than $2,000 over the next few years. Here is how: At an interest rate of 19.9 percent, the minimum payment on a $3,000 balance might be $90. That debt could take 182 months (more than 15 years) to pay off with only minimum payments, and it would accrue $3,325 in interest. By paying the gift of $500 toward the debt, the minimum payment would drop to $62.50. And if you continued paying $90 per month — the same payment you would have made originally — the debt would be repaid in 60 months (five years), with total interest paid of approximately $1,220, saving more than $2,000. Pay the debt off sooner to save more.
- Start an emergency fund. Deposit cash into an interest-earning account where you cannot instantly withdraw it, but where it is readily accessible in case of emergency. Most new grads will find that $500 will go a long way toward covering a medical issue, a sudden car repair, a job-interview suit or even a plane ticket in case of a family emergency, Ewing said. "When you begin working, aim to save 10 percent of your income to build the emergency fund to cover at least six months of living expenses."
- Open an IRA. Anyone can open an Individual Retirement Account (IRA). An 18-year-old who deposits $500 into an IRA that grows at a 6.5 percent annual rate until he or she is 67 years old will have almost $12,000. If that is not enough, Ewing suggested, set up an account that allows ongoing monthly contributions on top of the original deposit. Saving $50 per month for 49 years will amount to $223,000. If the account has higher returns of 8 percent annually, the balance will become almost $400,000. "If and when you are able, also participate in your employer's 401(k) fund to be on the road to healthy retirement savings," Ewing advised.
- Invest in a good suit. Graduates who will be going on job interviews or need to look professional at internships might find that a quality business suit can be a great investment. Go with classic styles and subdued, dark colors so that a suit purchase will endure for several years. "Seek advice from someone you respect, and do not be ashamed to bargain-hunt — you can invest money that is left over," Ewing said.
- Invest in life. For graduates who will travel post-graduation, a passport is a good and often-necessary investment. Those driving cross-country might get value from a membership in an auto/trip service such as AAA. Graduates who will be renting a first apartment can apply financial gifts to a security deposit. Around town, gifts could help pay for annual car insurance, a commuting bike or an annual transit pass. "The idea is to use the money for things that will get you a step further ahead in life," Ewing said.
"Putting graduation gifts to good use helps start your independent financial life on the right foot," said Ewing. "Making that investment is the perfect way to honor yourself and your achievement in attaining a major milestone in life."
Based in San Mateo, Calif., Bills.com is a no-cost one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt consolidation assistance, insurance, mortgages and other loans. Bills.com holds the No. 257 spot on the Inc. 500 list for 2008, and the No. 3 spot on Entrepreneur Magazine's Hot 100 list of the fastest-growing U.S. companies.
Bills.com and its sister companies, Freedom Debt Relief and Freedom Tax Relief, are wholly owned subsidiaries of Freedom Financial Network, LLC. The company has served more than 50,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available at News Releases.
Footnote 1 http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=513
Footnote 2 http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#debt