If you have kids graduating this year, chances are they're going to receive cash gifts from family and friends. And they'll more than likely want to go out and spend it, especially if they've never had a chunk of change to call their own.
We obviously can't make them do anything, but what should we encourage our grads to accomplish with that money?
Pay off debt. Start saving. Invest.
I heard those same three answers from four money professionals and a mom.
"This time of transition for kids is a great time to talk with them about handling money and budgeting," said Kate Preble, whose daughter is graduating from the University of Arizona. "My advice to my kids is to put the money away until they need it, because there will soon come a time when they need it."
Using the free money received for graduation is a great time for your kids to start saving, if they haven't already.
"Saving is the most appropriate use of that windfall," said Greg McBride, senior financial analyst for bankrate.com.
McBride recommends starting an emergency savings account, even if they've only got $50 to start it with.
"It makes life a lot easier to know you have money set aside for the unexpected," McBride said.
The best thing to do if your grad receives a modest amount of $250 or less is to open up a savings account at an online bank, said Marianne Leedy, a certified financial planner for Raskob Kambourian.
Opening an online savings account through a site like CapitolOne360 is Leedy's recommendation because they offer free accounts and they give more interest than other banks, she said. "Interest rates are low at banks right now."
When interest rates do increase, the change kicks in faster at online banks, Leedy said.
Paying off high-interest credit card debt is the number-one piece of advice Shelly Fishman, certified financial planner for LPL Financial, gives to graduates who receive money. "It's always a good idea to get out of the habit of having credit card debt," he said.
After paying off debt, they should start investing in retirement, Fishman said. "Get into the habit of saving 10 percent of everything you earn toward retirement."
"Americans are woefully undersaved for emergencies and retirement," Bankrate's McBride said. He sees graduation money as a chance to help a young adult get a head start on saving.
Roth IRAs (Individual Retirement Accounts) are a great way to invest toward retirement, Leedy said.
The only caveat is that grads have to have earned income for the year to open one. The maximum contribution people can make into a Roth IRA is $5,500 per year. Opening balance requirements will vary by institution, but they can be opened for little money.
"The advantage of a Roth IRA is once it's there, you will never pay taxes on it again," LPL's Fishman said.
Bankrate.com has a handy Roth IRA calculator. Enter current age, starting balance and the planned annual contribution to see how much that money can grow.
Larger sums of money can be invested in mutual funds.
"Historically, the market grows faster than anything else over a long period of time," Fishman said.
I went to Vanguard.com on Leedy's recommendation to explore investment options. The minimum investment amount for a mutual fund through Vanguard is $3,000. Get advice from a financial advisor if your graduate receives a large sum of money. The advisor can guide you through different investment options.
If your son or daughter wants to splurge a little, they should set a budget and stick to it.
Preble said that if her daughter wants to celebrate her graduation milestone, she should find something reasonable and spend a small amount on it. "That really cool shiny thing won't look so great if your car breaks down on the way to your job interview," she said.
If you're on the gift-giving end of the spectrum and you want to ensure money is put to good use such as a savings account, you can purchase digital U.S. Savings Bonds.
"If I were giving a gift to a graduate, and was hoping they'd save it, I'd like to put it in a place that's a little harder to get to than cash," said Jerry Kelly, director of the U.S. Treasury Department's Ready Save Grow campaign, which encourages Americans to save.
If your grad is in the habit of borrowing from savings, bonds are a good way to go.
Kelly said there is a 12-month holding period before the bonds can be cashed, and they're harder to get into than "reaching into their wallet and pulling out cash."
They can be purchased for as little as $25, all the way up to $10,000. Bonds are always free from state and local income tax. They do earn interest, and that interest is subject to federal tax. However, the principal is not taxed at all, Kelly said.
To learn more about savings bonds, see treasurydirect.gov/readysavegrow
"That really cool shiny thing won't look so great if your car breaks down on the way to your job interview."
Tucson mother Kate Preble's advice to her graduating daughter
Here's the short version of what financial experts had to say about how to handle money gifts. Clip this out and give it to a graduate-to-be.
• Start an emergency savings account. You never know when you're going to need it.
• Pay off credit-card debt.
• Invest toward retirement through a Roth IRA.
• Pay off other things that will burden you going forward.
• Use money gifts to cover moving expenses if you are moving for a job.
• If you must celebrate, purchase one reasonably priced item and save the rest.
"Centsible Mom" Angela Pittenger shares tips, news and ideas on how Tucsonans can stretch their budgets. Send your questions, ideas and tips to her at email@example.com or 573-4137.