6 Important Tips to Avoid Money Scams


We could all use a little extra money, especially in these troubling economic times. Unfortunately, there are too many people out there looking for a way to exploit our desire to make a quick buck. When it comes to money, we all make mistakes. However, some of these mistakes can be very costly, especially if we end up losing our life savings because of them. We can always benefit from being a little extra cautious when it comes to financial decisions. As the Bernie Madoff scandal showed, even apparently smart and rich people can get conned. Here are a few tips to avoid getting ensnared by a fraudulent money scheme…


6. If it’s an “easy way to make money”, avoid it

The richest people did not get rich overnight. They worked hard to get to where they are. There is no (legal) shortcut to making cash. If you want to make money, then you need to work for it. Many people lose money in stocks because they treat it like gambling. They blindly invest in quick-rich stocks rather than spending the requisite amount of time researching companies and funds.

If you come across an investment opportunity that advertises an “easy way” of making money, then it should automatically get your alarms bells ringing. If there really was an easy way to make money everyone would be doing it. Contrary to what you might think at the time, everyone else is also trying to get rich fast.


5. Do your own research

No matter who approaches you with an investment “opportunity” – friend, co-worker, spouse, shady salesman or investment banker – ALWAYS do your own research. Others may have more financial knowledge than you, but it is your money and you need to decide how to spend it, wisely.  If it is a publicly traded company, then find out more about it. The internet has many great sources for company information. Try contacting the company directly to inquire about their stock information. Publicly traded companies are also required to make their financial documents and records available to the public. Canadian companies’ records can be accessed via SEDAR (www.sedar.com) and American companies can be accessed via EDGAR (http://www.sec.gov/edgar.shtml).

You may also choose to speak to a third party financial adviser, e.g. at your own bank. Ask them if they have heard of this opportunity and what they think of it. Your bank has a vested interest in you keeping your money, so they may guide you in the right direction.

Take your time to learn. Do not ever feel rushed or bullied in to making a big financial decision. If someone is pushing you to pull the trigger “right away” or “the opportunity will be gone tomorrow”, then this should rouse your suspicions.

4. Know your P’s… Pyramids and Ponzis

Everyone has heard of Pyramid and Ponzi schemes, but few people understand them.

The problem with fraudsters is that they are forever entrepreneurial. They are always finding new ways to capitalize on age-old schemes. Pyramid and Ponzi schemes aren’t always easy to identify because they can be sophisticated and often operate under the guise of legitimate companies. In fact, most pyramid schemes now use a pseudo-legal format called “multi-level marketing”.

There is a simple rule to follow for Pyramids. If the scheme (may even be a publicly traded company) relies on you recruiting other people in to the scheme more so than selling a product, then it is likely a pyramid scheme.

Unlike Pyramid schemes, Ponzi schemes pretend to be exclusive opportunities. Rather than relying on large-scale, pyramid-style recruiting, they act like clubs that only special members are allowed into. Ponzi schemes most often offer an investment opportunity in a complex business or remote area (e.g. a foreign country) with the person offering the opportunity being the investor’s only access to information. Remember, if no one else has heard about it and you can’t access information about the opportunity from a widely accessible source then it is probably a fraudulent scheme.

Take the time to learn about money schemes now, in order to avoid trouble later:

Pyramid – http://www.phonebusters.com/english/recognizeit_pyramid.html;

Ponzi – http://www.sec.gov/answers/ponzi.htm

3. You’re not that special

All people, whether they suffer from low self-esteem or megalomaniacal narcissism have the desire to feel special. Fraudsters prey on this need. When it comes to money, there is but one golden rule: you are not special. Nature, God, or the Universe did not choose you, in this moment and time, to become rich. An opportunity did not just “fall in to your lap”.

If a person inviting you into a scheme flatters you with praise and singles you out as the perfect person for this opportunity, then you should immediately start seeing red. This is a good time for self-doubt. Why has this person sought YOU out for the perfect opportunity? Is it because you are smart, lucky and gifted? Or, is it really because you have money and are naive enough to part with it?



2. Don’t trust anyone

When it comes to money, it is acceptable to be a little cautious, even with the people we trust. This isn’t a cynical reproach, it’s the truth. Money makes people do stupid things. This doesn’t mean that you should be a miser or be cheap. It simply means that when it comes to investment decisions, you should take the pragmatic rather than emotional route.

At least once in your lifetime, people you trust the most (friends, siblings, spouses) will approach you with an opportunity to make serious money. Unbeknownst to them, this opportunity could be a very BAD one. Your friends may not mean to hurt you, but they may try to lure you in because they’re seeing the proverbial green ($). Since these are people close to you, you have to tread very carefully. They may get offended if you brush them off or label you as cheap. Try to deal with these people tactfully. If they are people that aren’t aware of your financial situation, tell them that you aren’t in a position to take on the financial risk at the time, despite the huge rewards. If they are family, take the time to listen to them and encourage them to research the opportunity with you. Suggest seeking a third party opinion together. At the end of the day, it is YOUR money, and no one should compel you to invest it in any way that makes you uncomfortable or puts you at risk.


1. Be smart

When others want to make you part with your money, they have many tools available to them. They use peer pressure, flattery, emotional coercion, or insult. People offering “opportunities” will regularly resort to cheap tactics and clichéd arguments to get you to invest. For example, one of the most common things people will say to you is, “Sometimes you have to take big risks to earn big rewards”. This ageless cliché is true to a degree. When it comes to financial decisions we can’t always horde our cash. Sometimes we do need to take risks. However, all risks should be calculated risks. There is a difference between making a sound, learned decision and financial suicide.

When it comes to your money, it always helps to be sceptical. We’re all waiting for that perfect opportunity to make us rich, so much so that we’re willing to blindly jump into the first one that comes along. Take the time to learn about investing, by speaking to a financial adviser or reading a good book on the subject. Trust your instincts. If something doesn’t feel right, it probably isn’t. Being smart with your money may save you from falling victim to the next big scam.



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