(FORTUNE Magazine) – Want a fancy kitchen mixer? A top-of-the-line $225-plus big-name model that you've only dared ogle? For you, it's free. How about a nice watch or some gold jewelry? Interested? Okay, let's go for a $500 watch. No problem. And no cost. Need nine pounds of premium beef and a creamy cheesecake to entertain the neighbors? Put your checkbook away. You've earned your free feast.

How'd you get so lucky? That fortune of free goods and services--not to mention a bounty of CDs, wine, magazines, and even gratis golf clubs, as well as the occasional floral arrangement--is available through an alternative currency that started out as frequent-flier miles but can now translate into much more than just another free trip.

As fewer and fewer of the miles travelers earn actually come from flying, there are more and more ways to trade in that currency. While the miles you accrue in the airline frequent-flier programs are generally valid only for free airline seats or upgrades, the credits you pick up from hotels or American Express, Diners Club or AT&T, are not. They can be easily exchanged for free hotel nights, on one hand, or a wide array of useful or frivolous merchandise, on the other.

But you've got to get smart about how you spend these miles. Not only are the offerings expanding, but so too are the exchange values of your miles or points. Consider: 50,000 Amex or Diners Club miles can be translated into 50,000 airline frequent-flier miles and then used to claim free plane tickets to Hawaii, or even Paris. That makes each Amex mile worth as little as 1.15 cents. But if you apply those miles to merchandise, they can be worth up to two cents apiece, nearly double the purchasing power you'll get from the airlines. On an expensive purchase, that difference adds up to big dollars saved.

Despite an extensive listing of merchandise offerings from Amex, Diners, and AT&T, among others, most customers still opt for the bad deal. "Travelers concentrate all their energies on building up their frequent-flier balances," says Randy Petersen, the Colorado-based editor and publisher of Inside Flyer, the monthly bible of frequent-flier fanatics. "No one should dump the credit they earn from a hotel or Amex or AT&T into their frequent-flier accounts."

Amex's catalogue is chock-a-block with free clothes, sporting goods, electronics, and choice comestibles. Can't decide? Then go for a $500 gift certificate at Saks Fifth Avenue or Tourneau, which can be had for 25,000 Amex miles. Using miles that way makes each one worth about 2 cents--or almost twice the buying power of miles used to claim that possibly elusive flight to the City of Light.

Want some delectable delights instead of a watch? Amex allows you to trade miles for bagels, lobsters, caviar, and wine. Those 25,000 Amex miles (or "points," as the credit card companies call them) will even get you a $210 high-fat feast from Pfaelzer Brothers, the steak-and-cake mail-order house. Going for the meat means that each Amex mile is worth less (about 0.84 cent) than if you cashed it in for an airplane ticket. But you can't eat a plane ticket--or airline food, for that matter--and who's to say that ticket will be available when you want to fly?

If you demand real buying power for your frequent-flier mileage, take a peek at the hotel frequent-stay plans. Free hotel rooms are much more valuable on a cents-per-mile basis and much easier to claim than airline seats. One example: Hilton HHonors, the frequent-user program of Hilton Hotels. If you accrue 20,000 Hilton points, you can trade them for 3,500 frequent-flier miles or a free weekend night at dozens of Hiltons. One Hilton in Orlando charges $79 a night on weekends, meaning that each mile is worth a big 2.25 cents. Again, that's almost double the value of using the miles on a free New York-Los Angeles ticket.

Also, when deciding between a splurge purchase or hoarding your miles for future airline tickets, keep this in mind: Airline frequent-flier programs are beginning to look a lot like the Social Security system. Their past performance has been generous enough (airlines doled out 13 million free seats last year), but the future looks something like one of Ross Perot's deficit charts. There are an estimated two trillion frequent-flier miles outstanding, and crudely calculated, that's the equivalent of 80 million free tickets. That's a real budget buster, since airlines already fill seven out of every ten seats.

And unlike Social Security, airline frequent-flier programs are almost totally unregulated. You have virtually no rights or legal protection if the airlines weasel on their free-ticket obligations. In fact, when it comes to frequent-flier programs, the airlines are the moral equivalent of those lumbering, secretive communist economies of the erstwhile Evil Empire. They are sole arbiters of how many miles you can earn, how many miles you can spend, when you can spend the miles, what value the miles have, and even whether there are ever any free seats available at all.

But your frequent-flier miles are neither your Social Security nest egg nor your meager earnings for a hard day's work on the collective farm. They are quite literally something for nothing. So, relax. Live a little. Spend a little more of your miles.

AT&T's True Rewards catalogue offers gift certificates to the Gap (a $25 version will cost you the equivalent of 5,000 miles), free subscriptions to magazines as diverse as Cat Fancy and Vegetarian Times, and more than 150 CDs. The payoff stinks (you get about a half-cent of buying power per mile) and the music isn't exactly at the cutting edge (do you really need another copy of In-A-Gadda-Da-Vida?), but hey, these are frequent-flier miles, not your retirement fund.

Savvy mileage manipulators can even turn some miles into cash. Sort of. Twenty-five hundred AT&T True Rewards points can be converted into 12,500 frequent-flier miles or a $100 U.S. savings bond.

On the surface, the savings bond offer is a lousy deal: Each mile is worth just 0.4 of a cent, compared with four times that much for the Honolulu ticket. But maybe it comes down to whom you trust. The feds may squirm, but you know they'll make good on that $100 savings bond someday. And airlines just can't seem to make up their minds what their miles are worth.

Domestic flights operate on many tiers: That roundtrip to Honolulu will cost you 45,000 miles (1.61 cents per mile). Fly continentally, and your miles (25,000 for a New York-L.A. roundtrip) are worth 30% less (1.11 cents per mile). And that trip to Paris runs 50,000 miles, valued at 1.15 cents per mile.

So, the savings bond may not be such a bad idea. You know what you're getting. And no matter how many miles you have, can you be sure that your airline will give you a free ticket when you want to hula on Waikiki beach?