On money scams and how to avoid them

THE title of my column now may sound like a popular movie about finding magical creatures. In real life though, there exists individuals who are able to trick people into investing their hard-earned money on their highly dubious schemes.

At a certain time, when you need your money back, these individuals have a tendency of magically disappearing, together with yours and other people’s money. Even if the long arm of the law catches up with these types of people, often the money is already gone; and you are only left with disappointment and tears.

Today, I will be discussing some of the most popular financial scams, and how you would be able to avoid them.

Advance fee scams

IN the days when e-mail messaging was still new and spam folders did not exist, you may have received an e-mail from a certain prince who is about to receive his due inheritance. The problem is, he needs your help (and your money) to be able to access it.

Once that is done, you get a big share of his wealth (much bigger than the money you are about to pay to him). If you had paid him money, chances are you would not get any returns on it.

This is a scam wherein you pay for something in advance without getting anything in return at all.

Ponzi scheme

THIS is a type of fraud that lures early investors with consistent, high and guaranteed returns over the course of time.

The problem is, there is no legitimate business that can support giving out these high returns. Plus, the money that is used to pay off the early investors comes from the funds being invested by the newer investors.

When fresh funds no longer come in, the company cash quickly dries up, and everyone loses their money. In other words, the money used to compensate investor A, comes directly from the money that Investor B and C invested. Investor A has no clue that the money actually came from the latter investors.

Pyramiding scheme

THIS type of scheme takes on a different approach as opposed to Ponzi and legitimate multi-level marketing.

In pyramiding, Investor A is rewarded if he or she is able to successfully convince Investor B and C to invest in the company. Investors B and C would then be able to earn by successfully recruiting Investors D, E, F and G to their ranks.

Once no new recruits or source of fresh funds comes in, the scheme collapses.

In a legitimate multi-level marketing program, compensation relies more heavily on product sales rather than simple recruitment. No product sales equals no compensation.

Coaching schemes

IN this type of scheme, instead of paying money to earn money, you will be investing money for the promise of knowledge that actually allows you to make money.

They will offer you a fantastic promise and a rags-to-riches type of story. They will back their claims with testimonials and entice you to invest, often with a sense of urgency. Once you take the course, you may be left with knowledge that has little value in the real world.

Note that not all coaching programs are scams. There are in fact, very good mentors out there, but you need to study what they offer first.

How then do we avoid falling into these kinds of money traps? Here are some of the things you can do:

1. Know how your money will be managed by the company you will invest in. If you do not understand the risks involved, it would be best to take a step back.

2. Know what is the risk-free interest rate. If you had invested your money on government bonds or treasury bills, what interest per month or per annum will you get? Note that treasury bonds and treasury bills are guaranteed by our government and you will certainly get both your interest and principal back after the bond period, making it risk-free.

3. Compare the risk-free interest rate with the ‘guaranteed rate’ a company offers you. If our government can only guarantees so much a return, how can a much a smaller company assure both your returns and capital? What are they investing in that make your returns so lucrative?

5. For the money you are investing in a course, what kind of knowledge will you learn? Is your mentor experienced and knowledgeable in that industry?

To end, allow me to quote this verse:

“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” (Proverbs 13:11 ESV)

Raymond Anthony Quisumbing is a Registered Financial Planner of RFP Philippines. Quisumbing would soon publish an e-book on starting a food business. Follow him at Twitter at @OhMyFinancePH. To learn more about personal-financial planning, attend the 91st RFP program this July 2021. To inquire, e-mail [email protected] or text at 0917-6248110.

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