8 financial train wrecks you can avoid

By MP Dunleavey

You'll never see them on a rerun of "America's Funniest Home Videos," mainly because financial bloopers are hard to catch on camera -- and they're not all that funny.

"There's Bob, about to close on that balloon mortgage!"

Still, there's a certain gory appeal to witnessing other people's costly financial mistakes. It's like watching a horror movie or rubbernecking as you drive by a car accident. You can be fascinated, horrified or smug -- all while eating popcorn and feeling relatively safe.

By now all these financial disasters are history, but it's never too late to learn the hard-won lessons of other people's financial foul-ups. May they help you avoid any future money mistakes of your own.

Nice guys finish last

Bryan Nadeau, a commercial film and video editor in San Francisco, just got two very costly reminders that you pay a price for being too nice when it comes to financial matters.

The first was relying on his contractor to choose the wood for the fence around his new deck. Rather than be a nit-picky homeowner, Nadeau says, "I trusted the guy would pick something reasonable." Instead the contractor chose cedar. Cha-ching! Add $13,000 to the bill.

The next was turning over his business taxes to a friend, who happened to be a qualified accountant just starting out on her own. "When she didn't know QuickBooks Pro, a basic accounting tool for small businesses, I should have heard warning bells."

But he didn't. The friend filed several extensions -- "even though I'd given her all the paperwork in February" -- and Nadeau ended up owing the Internal Revenue Service $12,000. "I should have stayed on top of her, but since we were friends, I didn't want to look like I was nagging."

Eventually $25,000 in the hole, Nadeau has two words that will be his MO when it comes to money: "hard-ass."

Strike while the stock is hot

Doug and Sally -- not their real names, and you'll find out why in a second -- wanted to cash in his dot-com employer's stock options, but they got a little greedy. Like so many people, they believed the stock might rise even further or split, so they waited. Instead, it started to drop.

"We should have done it when it was $200 a share," says Sally, a TV writer.

To make matters more complicated, Doug's position in the company put them (and the stock) at the mercy of certain blackout dates. On the morning they finally decided to cash in a chunk of stock to help them pay for a new home, they learned they wouldn't be able to, under the blackout rule. Subsequent company news caused the stock price to plunge, and the next time Doug was eligible to sell, the stock was worth pennies.

"We still think of it as 'The Day We Lost $400,000,' " says Sally. "But we framed the worthless stock certificate and hung it in the bathroom."

Neither a borrower nor a co-signer be

Carrie, 48, a not-for-profit lawyer in New York, felt she was spreading good karma when she co-signed a car loan for a colleague and friend whose girlfriend had just had a baby. "A colleague had helped me out with a car loan once, so I figured it was my turn to do a good deed."

It's unclear whether the standard forms for such agreements contain the warning, "Abandon hope, all ye who enter here," but they should.

Carrie's friend kept up the loan payments for a couple of years. But he and the girlfriend broke up. He moved away. "Then a letter came saying the car had been repossessed."

Carrie then got embroiled in a financial and legal quagmire that ended up involving a loan shark, two FBI agents and a fraudulent IRS representative. After six months of stress and drama, a judge threw the case out of court. The car was gone and so was her friend, but at least the actual cost in cash was minimal.

Don't cash out your future

Melissa, who works in tech support in New York, took a gamble a few years ago. She needed to make an expensive trans-Atlantic move . . . so she cashed in her retirement account. "I figured it wasn't very big to begin with, about $7,000, and so I'd make it up at my next job."

But her next job didn't offer retirement benefits, and five years later, Melissa doesn't even have an individual retirement account. It's not just the cash she lost that hurts, it's what that amount would have been worth by age 65 (assuming a 7% rate of return): $37,349.

Other common blunders

Brent Neiser, a financial planner and program director for the National Endowment for Financial Education, says we humans find all kinds of ways to get into financial hot water:

• Making assumptions, like taking a pricey vacation based on a presumed tax refund that never materializes.

• Acting on impulse.

• Abdicating responsibility to others (see Mr. Nice Guy, above).

• Being afraid to ask a few basic questions.

Asking the questions and weighing financial decisions carefully is key, says Neiser. "When you deprive yourself of the opportunity to get more information, you eliminate the possibility of making a better financial decision."

But sometimes the fault lies deeper, says Kathleen Gurney, a psychologist and author who studies the relationship of personality to financial well-being. "It's the behavior that recurs based on ingrained patterns that trips people up the most and creates havoc in their lives."

Rather than seeing the financial messes you've created as solely negative, Gurney says, look to them for insight into the repetitive choices or decisions you make that get you (and your money) into trouble. "I would say that we all have pitfalls in making financial decisions, but we get ourselves into trouble when we don't examine the reasons for the mistake. Those reasons always involve ourselves and the attitudes, beliefs and feelings that we had in making that decision."

And the biggest blunder of all . . .

There's still another route that is almost always guaranteed to go awry: Trusting friends and loved ones in any kind of financial transaction.

In researching this article I encountered so many of these examples I lost track:

• One guy bought a car from his sister-in-law, and, taking her word that it was in fine condition, he didn't have a mechanic check it out. He paid her the full Blue Book value ($5,000), and within six months the car promptly incurred $3,500 in repairs.

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• Another guy went into business with a friend, relying on verbal agreements for much of their business plan. A year into the venture, when she decided it wasn't profitable enough, she sued him for $100,000.

• Another woman had a joint credit card with her boyfriend -- and never saw a dime of the $5,700 he spent. "Just because they say 'I love you' doesn't mean they'll pay you back," she said.

Neiser says money decisions involving friends and family are particularly prone to disaster "because we don't go into them with that arm's length perspective. We bypass the normal protections: contracts, letters of agreement, legal advice, and so on."

Unlike other money blunders, which are often the result of laziness, oversight or putting your head in the sand, the friends-and-family money messes are often rooted in simple good will. "You don't want to offend the person or seem like you don't trust them, so you don't get things in writing that you should," he says.

But you should. Neiser says that if you feel awkward, explain that you've always had a policy of putting things down on paper just so everyone is on the same page.

If that doesn't seem convincing enough, "Blame your elders," he says. "Say 'My grandfather always told me to get things in writing.' No one will question that."