What Should You Do With a Surprise $10,000?

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If $10,000 suddenly and unexpectedly found its way into your lap, what would you do with it? That $10,000 is a substantial chunk of change. Still, while it's enough to make a difference in the short run, on its own, it's probably not large enough to drive a tremendous transformation in your life. Nevertheless, that $10,000 can be incredibly useful to you if you handle it well.

What exactly you should do with that kind of cash depends on where you are in your life and the rest of your financial situation, but there are some good general principles to help you shepherd that money well. Handled well, you could use that $10,000 as a means to jump-start the rest of your finances, and that could have a huge, positive impact on the rest of your life.

Priority No. 1: Get Out of Ugly Debt

If you've got ugly debt hanging over your head, use that $10,000 to pay it down. Chances are that no other use for your newfound cash will give you a better return than getting rid of ugly debts. So what makes a debt "ugly"? Well -- most debts are ugly, by their very nature.

In many respects, it's easier to describe what kind of debt may be reasonable to hold onto -- and to understand that the further away from that your debts get, the uglier they become. Reasonable debts are:

  • Low interest rate.

  • Tax-deductible.

  • Associated with assets worth more than the debt and aren't expected to lose value.

A low-interest rate mortgage on a house that isn't upside-down, for instance, could be a reasonable debt to keep around, rather than pay down with that $10,000.

Priority No. 2: Prepare for Things to Go Wrong

Call it karma, Murphy's Law, or one of the joys of owning something expensive and complex like a house or a car. Things will go wrong from time to time, and having some buffer against the unexpected will help you more quickly recover financially from whatever does happen.

A good rule of thumb is to have between three and six months of your living expenses saved up in an emergency fund. Depending on your costs of living, that $10,000 could provide a substantial portion of your emergency fund. While that level of savings can't protect you against a massive calamity, it can help you quickly recover from the small stuff -- and give you a way to tackle small problems before they spiral out of control and become big problems.

Priority No. 3: Bolster Your Retirement

With the foundation provided by those first two priorities in place, you can turn your attention to what will likely be the biggest investment in your life -- your own long-term future. If you're under age 50 and have sufficient earned income to cover the contribution, you can annually contribute up to $5,500 to an IRA. If you're age 50 or up, the limit increases to $6,500.

Additionally, if you have a 401(k), 403(b), or TSP style plan at work, the contribution limit is $18,000 for those under age 50 and $24,000 for those aged 50 and up. While $10,000 won't completely fill your 401k, it's an incredible start. Technically speaking, your 401(k) style contribution will be funded by payroll deduction rather than this $10,000 of "found money," but you can certainly supplement your costs of living from the $10,000 while shifting part of your paycheck to your 401(k).

Money you put in a qualified retirement plan may give you a tax break, either when you contribute it or when you withdraw it in retirement, and it grows tax-deferred along the way for you. While a one-time $10,000 investment won't be enough to fully fund your retirement, it will provide a strong foundation for your future plans.

Priority No. 4: Take Care of Your Other Priorities

If your retirement plan is already well-funded and on track to provide you with sufficient comfort throughout your golden years, consider putting that $10,000 toward another life priority. Maybe you'd like to help your kids with their college educations. Perhaps you'd like to upgrade your appliances or re-do your kitchen or pay off your mortgage sooner. Or maybe you're looking to take the vacation of a lifetime.

Whatever your next set of financial goals after retirement happens to be, $10,000 can go a long way toward helping you reach them. Just be sure to have the top three priorities covered first, or else you risk watching that money slip through your fingers and provide no long-term benefit for you at all.

That $10,000 Could Change Your Life

On its own, $10,000 probably isn't a life-changing amount of money, but it is enough to get you to think about what you'd do with it if it suddenly appeared in your lap. It's also enough to make a serious dent in any of the financial priorities you put it toward. Perhaps best of all, whether you're using the money to pay down debt or build your retirement, it becomes money you're putting to work for you.

The harder you make your money work for you -- whether it's a surprise $10,000 or the money you earn every day at your job -- the better off you'll wind up financially. So if you do find yourself with an extra $10,000, look at it as an opportunity to accelerate the financial plan that gets you firmly in control of your money for the rest of your life. With that kind of attitude, that $10,000 could very well become enough to change your life for the better.

Chuck Saletta is a Motley Fool contributor. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.