Graduation season is coming. Do you know what you’re giving your favorite college senior to congratulate them on earning their degree? Most young adults will appreciate cash, but if you’d like to give him or her something more satisfying, consider these options:
- Roth IRA contribution
- Student loan payment
- Life or disability insurance policy
- Seed investment in a mutual fund
- Personal finance book
- Certificate of deposit or U.S. savings bond
- Meeting with a financial advisor
Read on to learn how these gifts can help grads start adult life on solid financial footing.
Do you wish you’d begun saving for retirement at a younger age? You can help a young adult get started down an easier path by helping them fund their retirement savings, as well as teaching them why it’s important to do so.
Steven Jon Kaplan , chief executive officer at True Contrarian Investments, pointed out that young people, especially those with high levels of student debt, often cannot afford to max out a Roth IRA, which stands at $6,000 per individual in 2019. That’s why he thinks the best gift for any young person who is earning any income is for a parent, grandparent, or other close relative or friend, who has the means to do so, to fully fund that person’s IRA for the year.
“As long as there is a total of $6,000 in earned income for a single person, or $12,000 combined for a married couple — both do not necessarily have to be working — another person can fund their Roth IRA accounts for them,” Kaplan explained. “These accounts will grow tax free for life, and no required minimum distributions have to occur at any time.” Once the young person advances in their career and pays off their student loans, they will be able to fund the Roth themselves.
Although some student loans may have a grace period where no payment is required for a few months after graduation, interest may still accrue during this time. Making student loan payments right away will save money.
While these payments are certainly a realistic part of adulthood for many graduates, they can also be burdensome. If you’d like to help ease that burden, what’s the best way to do it?
“To help a friend or family member pay off their student loans, give the money to the borrower with the stipulation that they use the money to pay down their debt,” said Mark Kantrowitz , a nationally recognized expert on student financial aid, scholarships, and student loans. By having the payment come directly from the borrower, he or she will be able to claim any student loan interest tax deduction that may be associated with the payment.
The gift will have the greatest impact if you give the lender precise instructions on how to apply the payment. “The borrower should include a letter with the payment instructing the lender to apply the money to the principal as an extra payment and not as an early payment of the next installments,” Kantrowitz explained. “Otherwise, the lender will treat the borrower as being in a paid-ahead status, skipping the next installments.”
Putting the payment toward the loan with the highest interest rate will save the borrower the most money.
Learn more: Repaying student loans early: How to do it right
The younger you are, the lower the premiums will typically be for a life or disability insurance policy. Recent graduates are unlikely to consider purchasing these products without a push from a trusted adult, however. They may feel they don’t need them, can’t afford them, or, in the case of disability income insurance, not even be aware of it.
Life insurance may not be necessary for a young adult with no dependents, but locking in one’s insurability while young and healthy, even if only for a small, affordable 20- or 30-year term policy, is not a bad idea for protecting a future spouse or kids. (Learn more: Do you need life insurance in your 20s?)
Long-term disability insurance will provide an income in the event a person becomes too sick or injured to work. After all, one in four 20-year-olds today will experience an illness or injury that will put them out of work sometime in their career, according to the Social Security Administration.1 (Learn more: Is disability income insurance worth it? )
Your grad will need a steady income to qualify.
Want to get your grad started down the right path with long-term investing?
Then a good step could be starting an investment in a mutual fund or exchange-traded fund. Such a gift would give him or her a start on building long-term wealth, as well as an opportunity to learn the basics of investing and portfolio development.
In making the gift, you might want to point out how much the seed investment has the potential to grow to in 30 years, reinforcing the idea that such investments should never be traded or sold until the funds are needed, which could easily be decades away.
Learn more: Mutual fund and ETF basics
Your graduating young adult might not be inclined to listen to the adults in their life—but would they read a book and take someone else’s advice? If so, consider one of these personal finance classics:
- “Secrets of the Millionaire Mind,” by T. Harv Eker.
- “The Only Investment Guide You’ll Ever Need,” by Andrew Tobias.
- “Your Money or Your Life,” by Vicki Robin.
- “The Bogleheads’ Guide to Investing,” by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf.
For a more recently published book written by someone closer to your grad’s age, try one of these:
- “You’re So Money: Live Rich Even When You’re Not,” by Farnoosh Torabi.
- “I Will Teach You to Be Rich,” by Ramit Sethi.
- “On My Own Two Feet: A Modern Girl’s Guide to Personal Finance,” by Manisha Thakor.
- “The Financial Diet: A Total Beginner's Guide to Getting Good with Money,” by Chelsea Fagan.
Gifting a CD or savings bond is a solid way to help your grad with short- to medium-term savings goals that require preserving principal and not losing value to inflation.
Jason Reposa, CEO and cofounder of MyBankTracker.com, a financial comparison site, suggested becoming joint owners of a certificate of deposit account with your grad if you want to give a gift that you can keep an eye on.
“However, nothing can be done here to control the withdrawal of the funds, as joint owners of CDs have equal rights to withdrawal,” he explained. To actually control the use of funds would require a trust , which is more complex and expensive.
The CD will earn interest, on which tax will be due. Increase the value of your gift by paying the full tax liability, at least in the first year. In future years, you might split it—or make it the grad’s sole responsibility and take your name off the account.
You could also buy them a U.S. savings bond — perhaps Treasury Inflation-Protected Securities . These are guaranteed to retain their value by keeping pace with inflation. As a bonus, their interest income and principal growth are not taxable at the state or local level.
Paying for a private session with a financial advisor could be a great way to help a recent grad. They may be willing to share details or their current situation, plans, goals, and insecurities with a professional that they’d rather not share with friends or family.
Knowing those details, a financial advisor can use his or her expertise to lay out a plan for reaching goals such as paying off debt, saving for a home, starting a business, or whatever is important to your grad. They can also impart the importance of an emergency fund, retirement savings, and other fundamentals of sound planning.
Some advisors will agree to one-off sessions for a flat fee; not all planners require clients to meet a certain asset threshold or to sign up for an ongoing relationship.
Giving your favorite graduate a financial gift is a way to make sure your present has a lasting effect. The potential to set them up with a lifetime of financial security can be more valuable than cash, a car, or another more traditional gift.
Learn more from MassMutual...
1 US Social Security Administration, Fact Sheet, September, 2017.