When I was about ten years old, I received the first chain letter that I remember. At that point in my life, I had not received much mail so I was really excited to receive a letter. However, when I opened it, my excitement faded very quickly. This letter declared, with a descriptive diagram, that I could stand to gain a bunch of money and it was all very simple. There were four names, listed vertically at the bottom of the page. I was to give twenty cents (a decent amount of money to the non-earning kid that I was) to the person whose name was at the top of the list. I was then to make ten copies of the letter, putting my name in at the bottom of the list and moving the remaining three names one place up on the list. My instructions were to pass these copies out to ten friends and then wait for money to come my way, once my name got to the top of the list. The diagram very helpfully showed me just how much money I stood to receive. I can’t remember how much it was but I do remember that it was enough to get my friends and classmates chatting excitedly about all the things they could buy with the money they were going to get. There was was a high energy buzz in our class and I remember seeing classmates, writing out copies of the letter, as they prepared to keep the chain going.
Me? I was too busy being sad to get in on the letter writing. Why? Well, because, first of all, I did not have ten friends. All my life, I thought I was doing really well with the four very close friends that I spent just about all my free time with. Until the moment I received the letter, I had never felt that I lacked in the friendship department. But, once I got that letter I got to thinking:
- Why did I only have four close friends? Why didn’t more people want to hang out with us? Was there something wrong with us?
- What about the other people in my class? Could I consider them to be close enough friends for the purposes of this letter? I mean, we did go to each others birthday parties and sometimes we hung out? Could they be friends?
- But those other kids had friends too who were probably going to send them a letter. Could I send them a letter too? Was it okay to get more than one letter and end up in more than one chain? (That question was answered pretty quickly, as I received several letters over the next few days.)
- Who were my friends going to give their letters to, if not me and each other? Who did they know that, that I did not know, and they were friends with? Why had they not introduced me to them so we could all be friends? Was something wrong with me?
- If we were only friends with each other, this chain was going to end up being a tight circle, where we could not fulfill the the ten person rule and ended up just passing the letter amongst ourselves?
So, while others were making copies, I was feeling miserable (and receiving a few more letters). I was miserable because I didn’t know enough people to keep the chain going. So, I ended up being the person where chain letters came to die – something I also felt terrible about.
I didn’t know it then but that so-called chain letter was actually the first pyramid scheme that I came into contact with. It turns out that, once people get to thinking about it, no one knows enough people to keep the chain going. If a pyramid scheme is sold well, you can very easily miss that there are not enough people on the planet to keep the scheme going more than a few rounds. Sadly, pyramid schemes tend be be sold very well and that is why they are often so successful for those who start them. Sometimes the person selling you the idea will even tell you that your risk is nothing; that you can come back to them and get your money back if you have second thoughts (those tend to come when you realize that no one is sending you any money or that you have no one to recruit to this scheme). The person selling you the scheme will wax lyrical about all the money you stand to make just by putting in a little bit of money and basically sitting back and waiting on your network to do the rest. It all sounds very tempting – who doesn’t want a lot of return for a little effort? The truth, though, is that, just as the laws of physics dictate, so it is with money matters – it generally takes a lot of effort to get a little return. So, learn to protect yourself against potential pyramid schemes:
- Even when a trusted friend suggests putting your money into an investment, do some of your own investigating into the proposed investment. Try to find out how solid an investment it really is.
- Especially when the returns are supposed to be very high, be very careful. Great rewards come with great risks – decide how much you are willing to lose and how willing you are to do so.
- If someone tries to talk you into a program that requires recruiting people to put money into a fund so you can get a payout, think about how many people you would need to know in order to keep that program going. For example, if each cycle requires ten new recruits, after only six cycles, you would need one million recruits. That is unsustainable.
- You know the saying – if it sounds too good to be true, it probably is not true. You really do get nothing for nothing. So when someone comes to you with a get rich quick scheme, recognize that the person who will get rich from that scheme is mostly likely not you.
Pyramid schemes are illegal in the United States, with good reason. However, illegality has never stopped anyone from trying to run a scam. Know to recognize the red flags and remember that the few friends you have are probably what are keeping your money in your pocket.