Graduating college means saying goodbye to your friends and venturing out into the real world for the first time. But if you're lucky, it also means snagging some pretty generous congratulatory gifts. And chances are, at least some of those gifts will come in the form of good old cash. The question is: How should you spend it? You may be tempted to take your money and buy yourself the latest gadget or a fun vacation. But here's how you can use that cash responsibly instead.
1. Build an emergency fund
We all need money on hand for a rainy day, so if you're graduating college with little to no savings, it's smart to use your newfound cash to build your personal safety net. Your emergency fund should contain a minimum of three months' worth of living expenses, but the more you can sock away, the better. Having that emergency fund might prevent you from racking up costly credit card debt in the future. It'll also give you a bit of wiggle room for unplanned repairs when you buy your first home or automobile.
2. Pay off a chunk of your debt
Whether you're carrying credit card debt or are coming away from college with a heaping pile of student loans, the sooner you pay off what you owe, the less money you'll throw away on interest. Applying your graduation cash to your current debt will also reduce the amount of time during which you're paying back that money, thus allowing you to move forward more quickly.
3. Get a vehicle
Not everyone is lucky enough to have a car during college, and while you may have managed to get by without one by bumming rides to classes with friends, once you enter the working world, you'll more likely need wheels of your own. But whether you choose to buy a car or lease one, you'll probably need to put some money down, which is why it pays to use your graduation cash for that purpose. Even if you live somewhere with public transportation, having a vehicle could open the door to more job opportunities, so consider it an investment in your career.
4. Secure housing
Most people don't buy a home immediately after graduating from college. But even if you're not seeking to make a down payment just yet, you'll still need money to rent a home -- and that's where your graduation cash will come in handy. As a tenant, you're often required to put down first and last month's rent plus a security deposit to secure a lease. And that security deposit could easily be the equivalent of a month's rent or more. In other words, renting is not a cheap prospect, so you'd be wise to save a chunk of your graduation money for that purpose.
5. Open a retirement account
When you're in your early 20s and fresh out of college, retirement is probably the last thing on your mind. But the sooner you start building your nest egg, the more opportunity you'll have to amass a nice little fortune. If you already have a job lined up and your employer offers a 401(k), you can use that cash to fund that account (technically, you'd allocate that same amount to be taken out of your paychecks, and then use your graduation cash to pay yourself back, so to speak). Otherwise, you can look into opening an IRA provided you worked or are working during the year and therefore have earned income.
How much of a difference in your long-term savings might a contribution today make? Let's say you received $2,000 in graduation cash. If you invest that money at an average annual 7% return (which is more than doable given the stock market's history) and leave it alone for 45 years, you'll grow it to $42,000. And that's reason enough to not blow that cash.
If you're fortunate enough to have received money for graduation, you have a real opportunity to set yourself up for a financially stable foray into adulthood. So don't waste it. Once you start earning a steady paycheck, you can work leisure spending into your budget. Until then, be sure to use your money sensibly.