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10 smart ways to spend a windfall

Hit it big in your office's NCAA tournament pool? Or are you one of the lucky few who are getting an extra paycheck this year? No matter how you come by unexpected income, it's always a bittersweet surprise. It's nice to have the money, but what's the wisest way to use the windfall?

Decisions, decisions.

Remember, it's not the size of the windfall that matters, it's how you use it. Any amount can go a long way if you think before you spend.

Try one of these money-smart suggestions:

1. Pay down credit card debt.
OK, so this doesn't sound as appealing as a new DVD player. But if you can knock out -- or knock down -- the balance of even one high-interest credit card, you're making money. Think of all the interest you won't be paying.

2. Open an IRA.
Or, if you already have one, use your windfall toward your annual contribution. Been putting this move off until you had "a little extra money?" Today's your lucky day. Any amount "will compound nicely," says Chris Farrell, author of Right on the Money.

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3. Take stock.
Historically, stocks have produced nice returns and even a few hundred can get your nest egg off to a nice start.

"The biggest mistake people make is thinking [what they have] is too small an amount to invest," says Ric Edelman, author of Ordinary People, Extraordinary Wealth. "Rich people start off as poor people. The difference is they take the nickels and dimes and they invest it -- they didn't spend it all at the mall."

4. Set up a rainy day fund.
"Most people have a checking account and a savings account," says Farrell. "I like for them to set up a separate mutual fund account."

The money is there in an emergency, but since you can't just empty it out by writing a series of little checks you're less likely to touch it. The standard rule of thumb is to sock away three to six months of living expenses. So start with your windfall and take it from there.

5. Refinance your house.
Rates remain low, so if you've been looking at refinancing, your windfall offers a piece of change to put toward closing costs. Depending on the deal you get with your lender, your windfall might not cover the whole cost, "but it could take care of a nice chunk," says Farrell.

6. Add to your mortgage payment.
"For most people, this is better than putting it in a savings account," says Robert Van Order, chief economist in the financial research division of Freddie Mac.

7. Spruce up the homestead.
Thinking of a do-it-yourself landscaping or remodeling job? Take the windfall and get a professional to sketch out a plan for you to follow. For a few hundred dollars you will know exactly what you're getting into and how much of it you want to do yourself. Plus increasing the value of your home puts extra equity in your pocket.

8. Auto details, details, details.
Planning on selling your car anytime soon? "Getting your car detailed can make a huge difference if you are putting it up for sale," said John Clor, the Detroit editor for Edmunds.com. A thorough job, which costs about $175 for inside and out, could increase the price you get by as much as $1,000, says Clor.

9. Service your car.
"The No. 1 thing people forget with cars is to maintain them," says Clor. If you've been putting off that oil change and tune-up because you just didn't have the money -- this is the time. And check the tires. Extra bonus: A well-maintained car with properly inflated tires burns less gas and saves you money in the long run.

10. Get the star treatment.
If you've had your nose to the grindstone all year, your windfall could be a way to give yourself a much-needed treat. A full day at a local spa, a dinner at the best restaurant in town or tickets to a show you've been wanting to see for months could be the perfect way to give you a new, and better, outlook on your life.

"You'll be totally relaxed, feel good and it's probably something you wouldn't do under normal circumstances," says Farrell. "And you'll have a really nice memory."

Dana Dratch is a freelance writer based in Atlanta.

-- Updated: April 1, 2004

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