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Your Surprise Shortcut to Financial Ruin

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So you think you're in good shape? I hear that. You've gotten through the stock market crash without too much damage, you're not underwater on your house, your job seems secure, and your debt isn't out of control. Things are looking pretty good.

That's great. But are you sure you haven't missed something?

There are a lot of ways to blow through your savings, and most of them are way less fun than a 10-day bender in Vegas (assuming that's your idea of fun). Even if you think you're in great financial shape and riding out the economic storm in relative comfort, you could still be on course to screw it up -- while having absolutely no idea that your doom is imminent.

Things that go boom in your finances
I'm not talking about things like natural disasters or car accidents or sudden, serious health problems. Those things happen, and while we do our best to avoid them, sometimes lightning strikes.

I'm thinking of the kinds of things where it seems like everything's just fine -- you're feeling covered, you're sleeping soundly, but then something very bad happens that you could have avoided with a little preparation or a little more attention along the way. Things where you say, "Wow, was I stupid," only with less family-friendly language.

What kinds of things? Things like these:

Not carrying enough insurance. Sure, property values are down -- but if you bought your house a decade ago, it might still be worth 50% more than what you paid for it. Are you insured for that full amount? Put another way, if your house burns down tomorrow, will you be able to buy something comparable without wiping out your IRAs?

Likewise, have you thought about life insurance recently? Has your lifestyle changed? Are you making more money than when you set it up several years back? If you get hit by a bus tomorrow, will your family have to dig into the retirement funds to stay afloat?

Failing to sell when you should. Holding a cratering stock for too long is a common mistake -- I've done it, Fool Adam Wiederman did it with Allied Irish Banks (NYSE: AIB  ) , and many others did it with stocks like American Capital (Nasdaq: ACAS  ) , Satyam Computer Services (NYSE: SAY  ) , and Toll Brothers (NYSE: TOL  ) , among others.

Most of us just sigh and shrug and try to learn from the experience. But if you've got a portfolio full of these things, and you just let it fester because you can't bear to look… you could end up with not much portfolio at all. Diversify those holdings -- and keep an eye on 'em.

Waging a divorce war. I've seen several feature articles recently about couples who are postponing a divorce for economic reasons -- in other words, they've decided they can't afford (financially speaking) to live apart right now.  But there are plenty of times when folks conclude that a divorce is still the right thing to do -- and there are good ways and bad ways to get divorced.

I know of one couple who, despite starting the process amicably, ended up going to war -- retaining brute-force legal teams and waging epic court battles over every detail of their situation. The total bill for that mess was deep into the six figures, completely wiping out a stock portfolio that included shares of Akamai (Nasdaq: AKAM  ) , (Nasdaq: AMZN  ) , and (Nasdaq: PCLN  ) that had been bought at bargain-basement prices in the wake of the dot-com bust. They were both successful professionals in their early 40s, they had made some brilliant investments -- and they were left with nothing but hard feelings to show for it.

Another couple I know of -- acquaintances of the first -- made an explicit decision to avoid that fate. They hashed out an agreement with the help of a mediator, retained lawyers as a sanity check, and got through the process for a few thousand dollars -- while staying on cordial terms. There was no reason the first couple couldn't have done what the second did … no reason except that their emotions overwhelmed their common sense.

The upshot
These aren't the only ways to make a six- or seven-figure hole in your nest egg, and sadly, many of the worst of them are all too common among folks who otherwise have their financial acts together. But a little prevention and maintenance can head off many of the ugliest ones -- if you know what to do and how to do it.

Speaking of insurance, if you'd like some help double-checking your arrangements, check out the August issue of the Fool's Rule Your Retirement newsletter. This month's installment in the "Year of Fiscal Fitness" series is focused on insurance, with detailed explanations of how to make sure you're fully protected -- without spending a fortune. If you're not a member, no worries -- full access to the current issue and all of the Fiscal Fitness features is yours free with a 30-day trial.

For more on avoiding financial ruin:

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Fool contributor John Rosevear has no position in the companies mentioned. Akamai Technologies is a Motley Fool Rule Breakers recommendation. and are Motley Fool Stock Advisor selections. The Fool owns shares of Allied Irish Banks, which is a Motley Fool Global Gains pick. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2009, at 5:00 PM, mikeinmadrid wrote:

    I clicked through to this article from the Yahoo quote page on Akamai because I thought the article had something to do with Akamai. It doesn't.

    Please stop putting random ticker symbols in articles to get click-through. It doesn't make me want to buy any Fool services so stop it!!

  • Report this Comment On July 28, 2009, at 9:04 PM, warrenrial wrote:

    I agree with mikeninmadrid, this article has nothing to do with ticker symbols and yes stop it.

  • Report this Comment On August 05, 2009, at 10:08 AM, billkeo wrote:

    Insurance? I don't want any steenking insurance! I live life on the edge, constantly taunting fate. I grab danger by the ears and spit in its face. It's the only thrill I can afford. I'm not about to leap out of an airplane or try to jump the Grand Canyon on a motorcycle. Living without insurance gives me all the dare-devil zest I need in my existence.

  • Report this Comment On August 10, 2009, at 11:54 AM, GOFORAWILDRIDE wrote:

    Stop bad mouthing AIB ACAS

    I bought in at $1.45 and it is now at $6.00 a share a nice win for those who did not buy at the inflated prices.

    The stock market had so many signs that it was about to fall in August of 2008 that if you did not trade out and sit on the side lines like I did only to buy back in around Feb thru March of 2009 where you would have made 4-5 times your money in stocks like AIB.

    ACAS was even more juicy to me. I bought in at 1.18 in mid March and with the soon to be delivered dividend of 1.07 in stock I almost own these shares for nothing and it is trading at $3.00. A win win win for those who do not trade with their eyes closed as you seem to do.

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