Did you hear about the guy who lost everything investing in ancient archaeology? Turns out it was just a pyramid scheme. Being taken in by a real life pyramid scheme is a lot worse than that joke and there are plenty scheme out there.
Did you hear about the guy who lost everything investing in ancient archaeology? Turns out it was just a pyramid scheme. Okay, that was a bad pun, but you know what else is bad? Being taken in by a real life pyramid scheme and there are plenty of them out there. Rob talks about that first. This is MoneyWise Live - biblical wisdom for your financial decisions.
Probably the biggest reason folks fall for pyramid schemes is greed, the desire to make a quick buck. Solomon sure knew what he was talking about when he wrote Proverbs 21:5, “Steady plodding brings prosperity; hasty speculation brings poverty.”
A little history to explain pyramid schemes - They’re sometimes also called “Ponzi schemes”, named after Charles Ponzi who operated in the early 1920s. Ponzi may not have invented the scheme named after him, but he certainly perfected it until he was caught. Posing as an investing expert, Ponzi guaranteed clients a 50% profit within 45 days or 100% profit within 90 days.
The first people to buy in actually received those returns, but Ponzi was actually paying those people from later investors. As long as greedy people continued to invest, the scheme went on. But that meant more and more investors had to be paid. Eventually, when not enough new people were lured in, the whole thing collapsed, as all pyramid schemes do.
By the collapsed, the scheme had gone on for over a year and cost investors $20 million (270 million in today’s dollars.) All of this is highly illegal and Ponzi eventually served many years in prison.
Investors may be a bit more savvy these days, perhaps not easily taken in by a blatant pyramid scheme offering 50% profit in 45 days. But that doesn’t mean that they have gone away, or that some people still aren’t taken in by them.
It’s almost impossible to google “pyramid scheme” without getting hits that also contain the phrase “multi-level marketing” and, for good reason, many so-called “MLMs” are actually pyramid schemes in disguise.
The Federal Trade Commission is charged with protecting the public from such scams. It defines an MLM as a company that sells products or services through person-to-person sales. Some are legitimate, some are not. The FTC says a pyramid scheme type MLM can look a lot like the legitimate version and may even sell actual products, but they warn it could cost you and the people you’re pressed to recruit a good deal of time and money that you'll never get back.
Pyramid scheme promoters will lure you with promises of how much you’ll earn. They may tell you that you can quit your job and get rich by selling the company’s products, but the FTC says that’s a lie.
They also say that most people who get taken in by a pyramid-style MLM eventually realize that they’ll never be able to sell enough product or recruit enough new victims to make any real money and, in the end, they lose everything they’ve put into becoming an independent distributor for the pyramid scheme.
How do you spot one of these pyramid MLMs? The FTC has some warning signs:
Promoters make extravagant promises about your earning potential. Don’t be taken in. Those promises are false.
Promoters emphasize recruiting new distributors for your sales network as the real way to make money. That’s a dead giveaway. In a legitimate MLM program, your revenue would come from selling the product, not recruiting family and friends. (Think of the damage to those relationships if loved ones are also defrauded.)
Promoters play on your emotions and pressure you to “buy in now” or you’ll lose the opportunity of a lifetime. They’ll discourage you from taking time to study the company. The FTC says if that happens, “Leave by the nearest exit.” Any company that tries to pressure you to join is one to avoid.
Distributors buy more products than they want to use or can resell, just to stay eligible for potential rewards or bonuses. You can’t make money by selling to YOURSELF.
Next, Rob answers these questions at 800-525-7000 or via email at Questions@MoneyWiseLive.org:
If you're about to receive an inheritance soon, should you tithe on it?
If you're going receive about $150,000 of inheritance, have about $500 left at the end of each month, have a decent amount of savings and an emergency fund set up and you have a small personal loan of $38,000 at 5% and a mortgage with a balance of $160,000, are you okay to use the inheritance to pay this debt off?
If you've heard that legislation had been passed with provision to take away around 30% of people's retirement funds, is this true?
How is capital gains calculated?
If you're 66 and you rolled your 401(k) over to Vanguard where it's hasn't earned much and lately it's losing money, should pull the money out and use it to pay off half of a $150,000 balance on your mortgage?
Where is tithing mentioned in the New Testament?
If you're frustrated with the recent losses you've been seeing in your retirement account, should you cash it out and put it into an annuity?
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