Found money -- unexpected cash -- arrives in many forms. From a forgotten $20 bill recovered from a pocket to a surprise year-end merit raise, our budgets are periodically fattened with cash from unusual sources.
But not everyone uses found money prudently. Stories about rags-to-riches-to-rags lottery winners are common. Like air conditioning blowing through a top-down convertible, our funds often disappear.
About 41 percent of Americans use their spare cash to pay off debt, including credit cards and loans, according to a recent ACNielsen survey. Thirty-eight percent stash spare cash in savings accounts, followed by entertainment (28 percent), home improvement (27 percent), new clothes (26 percent) and vacations (25 percent). Survey participants were allowed to select more than one option, but only 14 percent placed spare cash in investments (stocks and mutual funds), or retirement accounts (13 percent).
What is the best use for spare cash and found money, I asked Ellen Siegel, a Miami-based financial planner. Her answers surprised me. Bottom line: Your use of spare cash depends on the size of the bonus and the health of your financial and emotional accounts.
''So much of this conversation is about emotions,'' Siegel said.
An honest audit of your spending habits will determine if surprise cash should be used to pay off credit card debt or boost retirement or savings accounts. For instance, if you are a compulsive shopper or an ''emotional spender,'' seeking an instant feel-good lift from new merchandise, you should think twice about applying windfalls to pay down credit card debt, Siegel says.
If you plan to maintain a low or zero balance, then the money is wisely applied to your outstanding credit card balance. This strategy works well for consumers who face a credit crunch due to one-time events such as a job loss or family illness. In those situations, paying down credit card debt, especially high-interest cards, will liberate a large portion of the monthly budget.
But for undisciplined spenders, a maxed out credit card balance effectively closes one shopping avenue, whereas a newly liberated balance may create a new license to spend. Siegel recommends that compulsive shoppers divide windfalls between long-term savings and retirement accounts, while making monthly credit card payments.
Meanwhile, a small bonus -- such as a $25 birthday check from a relative -- may fit best in your memory account, Siegel suggests. She recommends a dinner out or some other treat.
''If it's small and can't make a difference, just enjoy it and create a memory,'' Siegel says, adding: ``Or give it away.''
Here's more advice on handling windfalls from Your Hard- Earned Money and Get Rich Slowly.