Laura Rowley Money & Happiness

There is a fifth dimension beyond that which is known to man. It is the middle-ground between light and shadow, and lies between the pit of man's fears and the summit of his knowledge. With apologies to Rod Serling, it's the Financial Twilight Zone.

Halloween is a few days away, so imagine, if you will, a few ghastly personal-finance tales. Don't let these horror stories happen to you.

The Insurance Chasm of Terror

You lease a big, shiny, spankin' new $30,000 muscle car that you could never otherwise afford. Three months later, while you're celebrating '70s night with Moby at Beatrice Inn in Manhattan, someone steals your tricked-out ride and totals it. Your insurer cuts you a check for the Blue Book value -- $24,000. Unfortunately, the buyout on the lease is $28,000. You're stung for $4,000.

To avoid this trick, make sure your policy includes "gap insurance," which you can add for a relatively small monthly sum. Gap insurance is also important for new car buyers who put down a miniscule amount when they purchase.

Check with your insurer and leasing company to see if you're covered -- some states require gap insurance in a standard policy, and some leasing contracts include "gap waivers" that specifically protect you from this financial horror. The good news: If you don't have it, you can add it to your policy after you've purchased or leased.

You're done punching the clock for the man. You quit, and try to launch your own small empire -- perhaps a sandwich-shop franchise. A financial advisor notices you have a nice sum in your 401(k) retirement savings from your former employer. He suggests a method to tap this sum to buy your franchise without paying IRS penalties for early withdrawal or income taxes.

Here's how: You form a new corporation that sponsors a special type of 401(k) plan. You move your retirement funds from your previous employer into the new 401(k) plan. The new 401(k) uses these funds to purchase a big percentage of the stock in your new corporation. Now your corporation has the money to buy the franchise.

In a word, yikes. According to a U.S. Census Bureau study of new businesses launched in 1998, one-third had failed two years later (and that was in a strong economy). By 2002, just 44 percent remained in business.

So think twice before doubling down on this frightful strategy. Because if you don't play your cards right, you could end up without a job -- and the hope of ever retiring.

The Bank Vault of Horror

When Georgia-based NetBank went under in September, it was the largest savings and loan failure since the industry crisis that ended more than 14 years ago. A relative veteran in the world of banking-without-branches, NetBank started in 1996 and was undone by competition, loan defaults, and other factors, according to the Federal Deposit Insurance Corporation (FDIC).

But here's the really scary part: NetBank had some 1,500 deposit accounts totaling $109 million, which exceeded the $100,000-per-account limit insured by FDIC. Those poor souls will get their insured funds, and then line up in bankruptcy court with NetBank's other creditors to try to recover the rest.

One of them, a Brooklyn-based software company called Applied Cognetics, had $1 million in an account with NetBank. Some $900,000 of its funds are now in the Financial Twilight Zone. The moral of this ghastly tale: Don't keep more than $100,000 in a savings account at one bank. If you must, make sure it's a triple-A rated institution.

The Ghastly Spirit of Overconfidence

Investor overconfidence qualifies for the Financial Twilight Zone, because just when it seems that everyone recognizes the danger, the spirit returns like the undead. Remember the late '90s? New York financial planner Gary Schatsky still bemoans the client he had to cut ties with because the investor had an $8 million portfolio invested in seven or eight stocks.

"I was strongly urging the concept of diversification," says Schatsky, who asked the client to sell and reallocate at least half his holdings, or find a new advisor. "But much of safe investment wisdom doesn't smack of excitement and large profit. This was an individual who had enough money to never work again. My point to him was, 'Why risk having to work again when the additional profit won't really affect your life?'" Four years later the investor got back in touch: His portfolio had lost 98 percent of its value.

"It's a horror story that gets played out in many different contexts, and not necessarily with people who have millions," says Schatsky. "It's the concept that whatever success they experience they expect to continue -- and doing things more conservatively is not as much fun. But they do so at their peril."

I could debate the horrors of overconfidence and flipping real estate, but maybe it's better to look ahead. Signs of a recession are looming. How confident are you in your employment? If your response is 100 percent confident, and you feel no dread whatsoever, it's probably time to pay down your debt more quickly and build an emergency fund that holds at least three months' living expenses.

The ARM That Wouldn't Die

If I had an adjustable rate mortgage (ARM) and I didn't know when or how my mortgage would adjust -- or how that would affect my monthly payment -- I might be a little worried. After all, the media is now littered with nightmarish tales of mortgages gone bad. I imagine I'd be on the phone with my mortgage company to clarify a few "minor" details, since those details could determine whether I would remain in my home or should be packing my bags.

One would expect the vast majority of such homeowners to be preparing for battle. Not so, according to a study recently released by the AFL-CIO. It found that nearly half of homeowners with ARMs don't know how their loans adjust or reset, and nearly three-quarters don't know by how much their monthly mortgage payments will increase when they do readjust.

A sunny mood prevailed among those whose mortgages had not yet adjusted. Just 18 percent said they were worried about making their monthly mortgage payments over the next few years. It turns out that reality can be a real downer: Among homeowners who had already faced their first readjustment, 41 percent said they were worried about meeting their loan obligations.

Don't count yourself among those wretched souls who blissfully ignore their financial future, whether it's a skyrocketing mortgage payment, a retirement nest egg, or a college tuition bill. Those goblins will get you if you don't watch out.