Thursday, December 24, 2009, 3:18PM ET - U.S. Markets closed early today.

Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Next Stop -- the Financial Twilight Zone

by Laura Rowley

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story
Excellent (225 Ratings)
4.333328/5
Posted on Thursday, October 25, 2007, 12:00AM

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.

The 401(k) Gamble from the Black Lagoon

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.

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story

Rate This story

Excellent (225 Ratings)
4.5/5
Sign-in to rate!

51 Comments

Showing comments 6-35 of 51<< PreviousNext >>
Sort: first to last

  • Yahoo! Finance User - Monday, October 29, 2007, 5:19PM ET  Report Abuse

    • Overall: 5/5

    Great overview. Re: the Netbank debacle, it should be noted that while there are multiple levels of FDIC insurance - $100K per account; $200K per joint account; $250K per retirement account - the best way to keep large amounts of "cash" may be to ladder CDs via the CDARS program - www.cdars.com, through which one can enjoy up to $50M in FDIC insurance via a single participating bank.

  • Stephanie R - Sunday, October 28, 2007, 7:37PM ET  Report Abuse

    • Overall: 3/5

    Gap insurance is not for people who overbuy. New cars lose up to 30% of their value as soon as you drive them off the lot. On a 20,000 dollar car (your average price for on thats big enough for a couple kids) that is 6000 dollars you need to pay down in order to avoid owing more money than its worth if it gets wrecked or stolen. My husband and I bought a car in February for 18k, we can now get 14k for it. We underbought what we could "afford" according to many debt ratio charts, but if we did not have gap insurance we would be left with 4000 of debt if we lost the car. This is why we will always purchase gap insurance. Financial planners are not all ethical either, they are out to make money, not to help others. Stupid people judge those who make mistakes.

  • John H - Sunday, October 28, 2007, 6:49PM ET  Report Abuse

    • Overall: 5/5

    Several bulleyes here. That 401k rollover plan to buy into franchises has been a marketing technique used by franchises for years. Franchises should not be giving people the hard sell routine, but many do. I've helped clients sell a few of them (I'm a CPA). Do your research on success rates and whether there have been failures in your immediate area. Ask to speak with several of the people who succeeded AND some who failed. Why did they fail? Was it personal problems or did the formula just not work? If the franchise will not give you the names of any failed franchisees, walk away.

  • Yahoo! Finance User - Sunday, October 28, 2007, 5:07PM ET  Report Abuse

    • Overall: 4/5

    Good article, good points, along with the human interest side-A While its fun and today to pay bills on line and have an ebank there are risks. Sometimes a nice check aka papertrail is worth the 37 cents it takes to mail it. Sometimes a bank building you can actually walk into and talk to real humans is a plus. Still trying to figure out what a virtual safety deposit box/cash machine would look like. There are people out there called financial planners or financial advisors or some other name which means they know what they are doing. . They are almost always smarter than you are or think you are. A fool and his money are soon parted is an old saying---sayings like this get old for one reason and stay around forever because they are true.

  • MichaelB - Sunday, October 28, 2007, 2:03PM ET  Report Abuse

    • Overall: 2/5

    Most leases I have ever priced have gap insurance built-in (BMW/ Mercedes Benz). The reason is simple: it reduces risk for the owner (the finance company). Gap insurance is actually a good to consider if you purchase a car using traditional financing, or lease from a third party (such as Autoflex).

  • Missouri Mike - Sunday, October 28, 2007, 2:42AM ET  Report Abuse

    • Overall: 5/5

    Interesting story by the below poster. It turns out that God DID provide...in the form of his children and sons-in-law.

  • Yahoo! Finance User - Saturday, October 27, 2007, 11:50AM ET  Report Abuse

    • Overall: 4/5

    Nothing impresses quite as much as personal stories of financial mishaps which we can all relate to. I cannot be critical of stories such as these as being too simplistic for the simple reason that I have seen too many of my friends and relatives make assinine financial mistakes that one would think they would have enough common sense to avoid. The fact of the matter is that most people do not read the fine print or consider the worst case alternative (which is the outcome that seems to occur most frequently). A case in point is my father-in-law who somehow managed to ignore doing basic math and managed to almost bankrupt himself while running his paid-for farm. He had five bad years where he lost considerable money, spent a sizeable inheritance to make up for the losses, and cashed in his life insurance policies to hide his losses from his family (including his children, wife and other relatives). He woke up one day and found himself 75 years old, stone broke, with heart failure and could not buy his $1000 plus per month prescriptions to keep himself and his wife alive. His explanation was that God would provide, since he had lived right and gone to church-right! My wife, myself and brother in law managed to bail him out much to his everlasting embarrassment. The simple fact of the matter is that he failed to apply pencil to paper and plan ahead beyond having faith in God and social security. Little did he know that having educated and financially responsible children and sons-in-law would actually be his salvation. Interestingly enough, after making substantial contributions to his church for 50 years, we all noticed that the clergy was conspicuously absent when my father-in-law realized that he was broke and needed money. A little prudence can go a long way. I retired almost three years ago at age 49, yes age 49, and will never work again--at least in the traditional sense of the word. So get your paper and pencil out and do the basic math. Whatever you learned in grade school should be more than sufficient for anyone to be an adequate financial planner. Thanks for the relevant article.

  • WilliamB - Saturday, October 27, 2007, 9:58AM ET  Report Abuse

    • Overall: 5/5

    Stupid people are prone to do stupid things

  • Terry M - Friday, October 26, 2007, 11:06PM ET  Report Abuse

    • Overall: 5/5

    Great article! Especially the over confidence and Netbank story...

  • xkrebstarx - Friday, October 26, 2007, 10:23PM ET  Report Abuse

    • Overall: 5/5

    Thought stimulating.

  • Yahoo! Finance User - Friday, October 26, 2007, 6:22PM ET  Report Abuse

    • Overall: 5/5

    FDIC asked another online bank to buy some of NetBank’s assets so hopefully those who banked with NetBank didn’t have a full loss. Nevertheless, this is a very good informative article, I learned something new, as always. Thank you and keep up the good work.

  • Yahoo! Finance User - Friday, October 26, 2007, 6:05PM ET  Report Abuse

    • Overall: 5/5

    IMPORTANT, PLEASE READ. Yet another horror story relates to disability insurance. Like most folks, I paid for long term disability insurance through out my career. Then the unthinkable - I become disabled. CIGNA however, states that having had 10 major spinal surgeries, taking large doses of narcotics and a dozen other prescription drugs - barely able to hold my head up, does not qualify me for the disability benefits for which I paid. ERISA law supports CIGNA and other disability insurers - Not consumers. Now This, is truly a horror story!! It happens more often than can be imagined. So, make sure your employer uses an insurer more likely to pay. Demand it!! The roof over your head and the food in your children's mouths, depends on it. I kid you not. Drop CIGNA, and use a more ethical company.

  • Merlyn - Friday, October 26, 2007, 5:58PM ET  Report Abuse

    • Overall: 4/5

    You may be arguing about the specifics of the $100,000 insured, but here's another thought. If you had over $100,000 in wealth, shouldn't the rest be in a diversification of investments (stocks bonds, etc)?

  • John M - Friday, October 26, 2007, 5:35PM ET  Report Abuse

    • Overall: 4/5

    Umm. I beleive the article is incorrect. As the FDIC website states, it's $100,000 per depositor, not per account as Ms. Rowley incorrectly states.

  • Yahoo! Finance User - Friday, October 26, 2007, 5:14PM ET  Report Abuse

    • Overall: 4/5

    Hey passionatefocus: straight from the FDIC website... "The basic insurance amount is $100,000 per depositor per insured bank." That means you are wrong and Ms. Rowley is correct.

  • Ben C - Friday, October 26, 2007, 4:35PM ET  Report Abuse

    • Overall: 3/5

    Nice, but must point out the an error, "which exceeded the $100,000-per-account limit insured". The FDIC insured limits are $100,000. per depositor not account with certain exceptions to the limits i.e $250,000 for Individual Retirement Accounts per depositor.

  • Yahoo! Finance User - Friday, October 26, 2007, 4:14PM ET  Report Abuse

    • Overall: 5/5

    Great job. the cream is rising to the top!! Its unfortunate that less is more in the yahoo finance world as Penelope & Kiyosaki get the most attention by far.

  • JakeM - Friday, October 26, 2007, 3:49PM ET  Report Abuse

    • Overall: 5/5

    I have not heard of many of these issues before. I never knew that FDIC only insures up to 100,000 , or the 401k business plan. This is what I like to see. New information, solid advice, and an unpatronizing tone (uh-hem, generation debt...) . Rowley is the best writer on Yahoo Finance. (Although I still love Suze, sometimes her columns here are a little hackneyed. Much prefer her books and her tv show.)

  • Yahoo! Finance User - Friday, October 26, 2007, 3:43PM ET  Report Abuse

    • Overall: 5/5

    This is better than Hostel: Part II, The Grudge 3 and Saw IV put together. Not that it is all that high a barrier to leap.

  • Chay-nun - Friday, October 26, 2007, 2:29PM ET  Report Abuse

    • Overall: 3/5

    Yes, the advice is a many-times-told tale. I too would like a page for grownups. But the downside of the mortgage mess has been that the Federal Trade Commission has been trying for years to shut lawyers out of residential purchases and maortgage deals, saying they just added cost. What price a lawyer's advice to some of the subprimers who were told "you don't need a lawyer, just sign here" and are being thrown in the street. Best advice--if you trust any government you deserve what you get.

  • John - Friday, October 26, 2007, 2:29PM ET  Report Abuse

    • Overall: 5/5

    Laura Rowley - Excellent Penelope Trunk - Frighteningly Horrible! The People have spoken.

  • Justin - Friday, October 26, 2007, 2:14PM ET  Report Abuse

    • Overall: 3/5

    Nothin' new here for me, but I'm guessing I'm not the sort of person this article is aimed at, as I work as a financial adviser. Every day I give this sort of advice out to people who know much more about their own industry than I ever will do. Another 'tip' I would add about small print in contracts - read it twice when considering a financial adviser's fee! He he.

  • XX - Friday, October 26, 2007, 2:11PM ET  Report Abuse

    • Overall: 5/5

    hankm150, I challenge you to write an article and post it in the comments. Then let's all vote on you.

  • Napolean - Friday, October 26, 2007, 1:54PM ET  Report Abuse

    • Overall: 4/5

    Good article Laura. I am in the loan business and have recommended to homebuyers and investor many time to not buy their next property because of the risk they were taking, only to have my advise ignored. They are coming back to me now and unfortunatly there is not much that can be done.People need to listen to the professional especially a financial planner. Get good advise and stick to it.

  • Pam - Friday, October 26, 2007, 1:28PM ET  Report Abuse

    • Overall: 5/5

    Excellent "Heads Up" commentary...we all can't be experts on everything! However, I would like to see some writer comment on the failure of the Dept of Banking and Finance that oversees the risk acceptability of mortgages....seems to me somebody was asleep at the switch for permitting this debacle to happen. I sure hope there is a congressional investigation, although it probably won't happen until Mr. Bonehead is out of office!

  • Yahoo! Finance User - Friday, October 26, 2007, 12:56PM ET  Report Abuse

    • Overall: 4/5

    Insurance is for protection against loses you can't afford to pay yourself. If you need gap insurance for your auto policy, it is probably because you are buying more car than you can afford. Get something cheaper (maybe even used) and put more money down and you won't have any gap to insure.

  • Yahoo! Finance User - Friday, October 26, 2007, 12:47PM ET  Report Abuse

    • Overall: 3/5

    This is a nice reminder in a humorous way of what can happen when people make foolish financial decisions. The amazing part is there are people who make these kinds of foolish decisions everyday. It's great that the government has established controls and setup financial incentives to help Americans make money or try to protect us but there is still risk involved. I'm not sure how to do it but people need to learn how to manage their money and understand and assess the risks they are taking.

  • Yahoo! Finance User - Friday, October 26, 2007, 11:56AM ET  Report Abuse

    • Overall: 4/5

    Very Good article for those w/o common sense. As pointed out, all these horrors are avoidable: 1) I don't get the expensive cars mentality. What is it? Is the car a trophy to show your Social Status? I rather show myself as a poor person on the streets and live as a rich person in financial security. 2) Leave your 401K alone!! It's designed for Long Term Investment, let nature take its course. If you change job, roll it over to IRA in a well known Finance Institute. 3) Again, open accounts in a large well known Financial Institute, such as Citigroup. 4) Don't invest in things you don't understand and don't think you know it all. I know very little about Real State investing so when my bro-in-law begged me to invest in a $2M commercial lot during the boom; I did not, and now he is in bankruptcy. 5) I know very little about mortgages, so I went Traditional Mortgage. Another bro-in-law went Interest only during the boom, and guess what, he is also in bankruptcy and lost the house plus $60,000.

  • Mark - Friday, October 26, 2007, 11:30AM ET  Report Abuse

    • Overall: 4/5

    Very good, if for no other reason than that Laura doesn't pack her "articles" full of revenue generating links like some others we know.

  • Chicagoan - Friday, October 26, 2007, 11:13AM ET  Report Abuse

    • Overall: 4/5

    Good article but where is the "Nightmare of Diability Insurance"? Medical bills are a commonly cited reason for people who file bankruptcy.

Showing comments 6-35 of 51<< PreviousNext >>
The columns, articles, message board posts and any other features provided on Yahoo! Finance are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author's own and not necessarily those of Yahoo! and there is no implied endorsement by Yahoo! of any advice or trading strategy.

More From Laura Rowley

Money & Happiness

Discover the secrets to financial happiness. Laura's book offers practical tools and positive strategies to create "the good life" in a meaningful way.

More about Money & Happiness

Learn to identify your values, banish debt, start saving, and investing; plus Laura's favorite online resources.

Order your copy of Money & Happiness today and boost your financial well-being!

More from Yahoo! Sources

  • CNN Money
  • Consumer Reports
  • Kiplinger
  • The Motley Fool
  • Business Week
  • Wall Street Journal

Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data and daily updates provided by Morningstar, Inc. Fundamental company data provided by Capital IQ. Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.

Yahoo! Answers is provided for informational purposes only, and no Q&A is intended for trading or investing purposes. Yahoo! shall not be responsible or liable for the accuracy, usefulness or availability of any Q&A information, and shall not be responsible or liable for any trading or investment decisions based on such information. View Complete Answers Disclaimer.