Personal Finance | May 9, 2019

Life After Graduation: How to Manage a Signing Bonus

If there’s anything better than landing a job right after graduation, it’s finding out that it pays a signing bonus. These days, employers are increasingly turning to signing bonuses to attract top-performing college graduates. According to the National Association of Colleges and Employers, 56.8% of employers plan to offer signing bonuses to 2018 graduates—the highest percentage in the last five years.1

If you’re a new grad fortunate enough to be receiving a signing bonus, think carefully about how you might make the most of it.

First things first: Try not to view it as “free” money. After years of pinching pennies as a college student, you might be tempted to spend your entire bonus on something fun but impractical, like an expensive car. However, if you can resist the urge to spend the whole sum, you can begin to lay the groundwork for a healthy financial future.

Here are five ways to put your signing bonus to good use:

1. Take care of immediate expenses. If your new job requires a relocation, consider setting aside part of your bonus to cover expenses such as moving fees, rental deposits and necessary household items. 

2. Pay down debt. If you accumulated some credit card debt in school, you’re not alone. On average, recent college graduates who hold credit cards have revolving balances between $2,351 and $2,788.2 Start by paying the minimum amounts due on all of your debts and then paying down that high-interest-rate debt first, particularly if the rate is variable—when interest rates rise, your variable-rate loan payments rise as well, and that’s a headache you don’t need. Then move on to lower-cost debt like personal and student loans. 

3. Save for emergencies. Even the best-laid plans can get derailed by surprise expenses or setbacks. Cars break down, computers get stolen, companies downsize. Aim to keep three to six months’ worth of living expenses in an easily accessible bank account to cover such emergencies. If you’d like to earn more on your rainy-day money than what a savings account typically yields, consider keeping it in a fund that includes relatively liquid investments that may earn a slightly better return, such as a purchased money market fund, certificates of deposit or short-term U.S. Treasury securities.

4. Start investing. As a young investor, time is on your side. The sooner you put your money to work, the longer it has to benefit from the effects of compounding. For example, if you were to invest $1,000 at age 21 and keep it invested until age 65, your money would grow to almost $13,000, assuming a hypothetical 6% annualized return. Conversely, if you were to wait to invest until age 30, the initial investment would grow to roughly $7,700—more than $5,000 less because of a shorter time for compounding.3

5. Celebrate yourself. Spending your entire bonus on fancy gadgets or luxury vacations isn’t a great idea, but that doesn’t mean you shouldn’t spend a little bit celebrating your new job and the start of your life after college. Don’t feel guilty about spending some of your bonus money on yourself—because you earned it.

These tips don’t just apply to a signing bonus, but also to graduation money or any unexpected gifts or income. If you establish good habits now, you’ll have a lifetime to enjoy the benefits.

1National Association of Colleges and Employers, “Percentage of Employers Offering Signing Bonuses Climbing,” January 8, 2018.

2Sallie Mae, “Majoring in Money: How American College Students Manage Their Finances,” 2019. Compound Interest Calculator. Assumes an annual return of 6%, which is used for illustrative purposes only and does not represent an actual product or return available. Investing involves risk to principal in that you may receive less than the amount originally invested. 

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