Where grads should park their commencement cash

It's the season for graduation gifts. And for most high-school, college and grad-school grads, there's one gift that's king: cash.

With friends and family happily piling on, many grads will find themselves sitting on a sizable stash of cash after their diploma walk.

"High-school and college (money) gifts are the same as hitting the lottery: It feels like a windfall," said Paul Golden, a spokesman with the National Endowment for Financial Education in Greenwood Village, Colo. "But no matter whether it's a million in the lottery or $500 in cash gifts for graduation, you need to sit down and plan out what you'll do with that money."

Some, like Steve Schaus of Roseville, Calif., know what they'll do. Schaus, a 23-year-old computer-science graduate from California Polytechnic State University in San Luis Obispo, doesn't know exactly how much he might receive. But assuming it'll be more than burger money, "I think I might invest it in the stock market, since it's at such a low point and might start swinging back up,"said Schaus. "It seems like a smart idea."

That's exactly the kind of savings mentality financial advisers like to hear.

Where are the best places for graduates to park their commencement cash? Here's the advice from some financial experts:

Splurge — a little

When you've got a pile of checks and cash, it's tempting to blow it all on a big night out with friends or a spending spree at the mall. But stick to the 10 percent rule, say financial advisers.

"Cash in hand can be a pretty dangerous thing,"said Ethan Ewing, president of Bills.com, a personal-finance Web site based in San Mateo, Calif. "If the gift is burning a hole in your pocket, allow yourself to spend about 10 percent frivolously," Ewing said. "If you get $500, take $50 and have a great time. You've still got $450 left. ... Make that untouchable."

Do a trade-in

If you get a $50 iTunes gift card, for example, think about trading it for cash.

"If you sell it to a friend for $45, it helps your friend," said Ewing. "He saves $5."

If you then add that cash to a savings account, a money market or a Roth IRA, for instance, you'll be even more ahead of the game. Socking away the money in savings, especially in something like an IRA, will do far better over the long term due to compounding interest.

"By putting that money away now, you'll never miss that $5," he said.

Ditch the debt

The average college student has at least $3,000 in credit-card debt, according to various studies. Attacking that debt could be your best short-term investment — a gift to yourself.

"Paying down that debt should be a top priority," said Golden, with the National Endowment for Financial Education.

Pay off your highest-interest-rate card first. The interest payments you'll save, and the credit improvement you'll gain, will be far more rewarding than any graduation speech you'll ever hear.

Get saving

Especially for college graduates in this economy, start with a goal of a few hundred dollars, said Golden. "Treat it like a part-time paycheck to tide you over during your job search."

And when you land that first job, "Pay yourself first," he said. "Set up electronic transfers directly into a savings account."

Consider setting up a short-term CD for three to six months, which can be better than a regular savings account because it forces you to wait to use the money.

Open an IRA or Roth

An 18-year-old who deposits $500 into an IRA or Roth account that grows at a 6.5 percent annual rate will have almost $12,000 when he or she hits age 67, said Ewing. To save more, set up an account with additional monthly contributions. Saving $50 per month for 49 years will amount to $223,000 — and substantially more in accounts with higher interest rates, Ewing noted.

A Roth account "is really designed for younger people in low- to mid-income brackets. The benefit is down the road because your interest compounds tax-free," Ewing said.

Start an emergency fund

Unexpected things happen. To avoid getting caught empty-handed, deposit a chunk of graduation cash into an interest-earning account where it's readily accessible in an emergency.

In a layoff-riddled world, college graduates need to keep something set aside. "When you begin working," said Ewing, "save 10 percent of your income (each paycheck) to build an emergency fund to cover at least six months of living expenses."

Get suited up

Graduates heading to job interviews or internships might want to invest in a professional-looking suit. Go with classic styles that will last and don't be afraid to bargain hunt at outlets or consignment shops.

Or do as Ewing did for his first college internship at a mortgage company. Trying to stay within a budget, he borrowed his business attire from a neighbor — "all the way down to the shoes."

Invest in life

Don't forget to cover yourself. If you're out from under your parents' financial wing, don't neglect purchasing health insurance, even if it's only short-term until you're covered by an employer. For graduates planning overseas travel, invest in a passport. For driving, consider auto memberships like AAA that could save you big-time on car repairs, towing and jump-starts. Spend a cash gift toward that security deposit on a new apartment. Or use it for transportation costs — 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.

And here's his final bit of graduation wisdom:

"Part of being young is learning from mistakes,"he added. "But financial bad decisions can stay with you far longer than social, short-term mistakes that you shake off and get over. If you start making good decisions now, it can be habit-forming."