If you know someone who graduated from college this summer, and want to treat him or her to a more generous present than a graduation gift cliche like a pen and pencil set, consider setting up a certificate of deposit for the graduate.
After all, recent graduates are typically starved for money. A CD, or a laddered series of CDs at good CD rates, can give graduates what they need, but in a way that encourages them to exercise some financial restraint. They might even learn something in the process.
Here are four reasons why CDs can make ideal graduation gifts:
- Timed payments create budget discipline. The dilemma with giving a large sum of cash is wondering whether the graduate will spend the money wisely. After all, young people often have trouble separating wants from needs, and a financial gift that is meant to be helpful can easily be squandered. Unlike a savings or money market account, because a CD makes the money available at some future date, it enforces a little budget discipline on the recipient. By making sure the graduate has time to think about how to spend the money, a CD can help guard against impulsive purchases, and guide the graduate to ultimately spend the money on something that will be genuinely useful.
- College graduates need to dig out from their debt burdens. One reason money is such a welcome gift is that graduates typically walk away from college with a diploma in one hand and a loan repayment schedule in the other. People today graduate from college with an average debt burden of more than $20,000. Especially in a soft job market where employers hold the upper hand in dictating compensation terms, paying down that debt can make it tough to make ends meet, let alone start to save money.
A CD can give the college graduate a head start in paying down that debt. Since student loan debt often allows a grace period after graduation before payments have to be made, a CD can be timed to coincide with the expiration of that grace period. You could even give a series of laddered CDs with different maturities, to help the student meet a series of payment installments.
- Seeing how CD rates differ helps teach the fundamentals of interest rates. Another benefit of giving a laddered series of CDs is that it will illustrate how interest rates on CDs work. Under most circumstances, longer CD terms will pay higher CD rates. This shows how there is generally a trade-off in finance between time and reward.
- Rollover decisions create additional learning opportunities. Whether you give a single CD or a laddered series of CDs, when a maturity date is reached it will create additional learning opportunities. Weighing rollover options and comparing available CD rates will help the recent graduate gain some experience in shopping for bank products, and see the rewards that can come from making the effort to shop around.
CDs not only represent a generous gift, but also one that is thoughtful and is just what many graduates need. In short, they can be the ideal graduation present.