At Freedom Finances, we are all about building wealth and financial literacy with responsibility and integrity. Unfortunately, today there are people and organizations out there promising riches, but ultimately, they are just looking to take your money. Rarely does anyone get rich quick, and those who do are usually the luckiest of the lucky, or they are taking advantage of others.
We are going to review some get-rich-quick schemes, how to avoid them, and how to change your mentality so you do not fall victim to these scams. Let’s start with something that is not a scam, but plagues our culture today: lottery tickets.
Lottery Tickets
Lottery tickets may seem innocent enough, and ultimately, the system is set up to tax the winner to benefit the state, while the rest of the money goes to the winner. Spending a few dollars on a lottery ticket does not significantly impact a personal budget, but many who buy tickets struggle to fix their mentality after hoping to win big.
While many have likely heard some of the statistics before, let’s review the chances of winning when playing the lottery. The chances of winning the jackpot for Powerball are 1 in 292.2 million. That means you are 6,200 times more likely to die from being stung by a bee than you are to win the jackpot. You are 1,500 times more likely to be struck by lightning than to win the Powerball.
When people play the lottery, they set aside their mental acuity for a 1 in 292.2 million chance. Pretty much everyone who buys a ticket knows they aren’t going to win. However, the false hope that you give yourself when you buy a ticket can result in you spending your day or night waiting to see if you’ve won, while losing the initiative to do something more productive with your day or finances. If you are someone who struggles with the lottery, or spending money on lottery tickets, give yourself a chance to earn that money back. You can stockpile the cash you are spending and put it towards something that will make you money. On average, individuals spend about $288 a year on lottery tickets. About half of the U.S. population buys lottery tickets. That means that most people who are buying lottery tickets are spending about $576 a year for a 1 in 292.2 million chance at winning the big one. Instead of throwing away money, put that money towards something productive.
If you want to turn your money into something else, you can. For $576 a year, you can buy stocks, bonds, or even CDs. Let’s say you invest that $576 at a 5% annual rate for 25 years. Instead of throwing away over $14,000 for literally nothing, you will end with nearly $30,000.
One last thought to close the discussion on lottery tickets: If you played the lottery 188 times over 25 years, with a 292.2 million chance per play, your chances of winning the lottery over those 25 years are 0.000016.
Sports Betting
While betting on sports can lead to success relatively regularly, it can also be destructive. Sports betting has become a major mainstay in today’s American culture. It is difficult to watch TV, especially a sports game of any kind, without hearing at least one commercial for betting. The commercials always have some incentive to get started, like a free $100 with your first $5 bet. This is important because once they get you started, they know you will struggle to stop. Sports betting also works diligently to decrease your chances of winning while increasing your spending. All you have to do is bet on which team will win the game, who the top performer will be, and what the score might be, and you can win big bucks! But also, all of a sudden, you’ve spent more and more money with a lower chance of winning.
Sports betting can be addictive and destructive. Many people who place bets are spending hundreds of dollars a month. While many are trying to have fun and see small winnings back in their pockets, many struggle with the addiction.
Last year, Americans spent $150 billion on sports betting. That means the average person spends about $438 a year on betting, but not everyone is betting. Only about 25.02 million people participated in sports betting, which means the average person who is betting on sports is spending over $6,000 a year.
The average probability for a bet to win is 45.5% for a basic bet, but it is likely much smaller with additional bets made to decrease the user’s chances at winning.
Let’s be extremely generous and say betters win 40% of their earnings back (though we know it is likely much lower than that). This means that the average sport better is spending $6,000 to win $2,400 a year, meaning $3,600 of the average sports gambler’s money is thrown in the trash every year.
As is common, the higher the risk, the higher the reward, and the lower the risk the lower reward, so most people are spending high end dollars on sports betting to rarely get any reward back.
Pyramid Schemes
Let’s move on to something most people recognize as scams, but the dynamic and language have changed. No one would ever try to sell you on the wording “pyramid scheme,” but instead, the key phrase here is “multi-level marketing.” With multi-level marketing or pyramid schemes, someone at the top tries to get people to invest below them. The goal is to have investors selling for one individual, and then those investors recruit others below them to sell, while portions of the profits trickle their way up.
Pyramid schemes almost always fail, and usually quickly. There is a limited number of people to recruit to sell a product for you, and an even smaller number willing to sell for them. Eventually, people will catch on to the scheme or will spend so much money that the pyramid collapses.
Besides the fact that pyramid schemes are illegal in many places, the problem with them is that they promise riches, or at least a solid profit or income, but ultimately, the money those who invest is wasted. Many people spend thousands of dollars to buy into the scam and rarely make much of their money back. When they do, a small portion of that money goes to pay off their initial investment, while another portion of their profits goes to their upline.
Those who start pyramid schemes sometimes win, stealing thousands or hundreds of thousands from those below them, while sometimes they are caught and prosecuted. Be aware of investment schemes; people use phrases like “investment clubs” or “gift programs,” but ultimately, what they are saying is “pyramid scheme.” This is a lose-lose for anyone looking to invest. You are wasting your time and money, all while hurting your reputation amongst your friends and family.
There are legitimate sales jobs out there, but be aware of those that are illegitimate and ask for an initial investment. Unless you are starting your own business, you should not be required to give money to start a job.
Junk Coins/Crypto/Rug-Pulls
The last topic we’re going to cover today is a newer trend in the world: junk crypto, often called “scam coins” or “hype coins.” Due to the rise of cryptocurrency and legitimate ones like Bitcoin, many people have attempted to jump on this crypto train to make millions or billions of dollars. Some attempts to create a new coin or crypto are legitimate but fail anyway, while others are illegitimate or meant to rug-pull investors.
Creating a new cryptocurrency is difficult and technically extensive. To create one, substantial computer programming knowledge is needed, along with cloud and physical storage needs. Creators must either have the programming skills themselves or hire experts to do so, which can become extremely expensive. There are also issues with security, keeping the coin or currency safe from hacking or theft, which requires more programming experience and knowledge, and therefore more time and money.
While it’s not impossible to create a new coin and not be a scam, these days most new coins fail. Bitcoin is the oldest of known cryptocurrencies, as well as the most secure and legitimate. New coins often fail, and investors pull out, leaving those who invested with nearly worthless investments.
Today, many people will create a new crypto with the intent of making a large sum of cash, only to pull out when the price goes up, thereby leaving other investors with thousands of worthless coins. We’ve heard of these schemes before; some have even been prosecuted for illegitimate practices. What is most common, however, is celebrities with large followings promoting a new coin to get their followers invested. These celebrities are either paid hundreds of thousands or even millions to promote the coin or have a stake in the new crypto. After they get their followers to invest thousands or tens of thousands of dollars, once the coin reaches a significant value, they pull out and sell their stake in the coin.
It’s not always celebrities who pull these scams. These schemes also target certain groups of people, such as those perceived to be anti-big government right-wingers who want a decentralized system. They use this discussion as an in with certain groups, and you might hear phrases like “Do you really think the Federal Reserve is going to hold up in our nation?” or “Eventually, traditional currency is going to fail, so you should get in before you miss your shot.” You might also hear, “You may have missed out on Bitcoin, but don’t miss out on this.”
These are all fear tactics or sales tactics aimed at getting your money and encouraging you to invest. If you hear this, don’t walk away, run.
Protect Your Finances, Protect Your Mentality
Those who spend money on lottery tickets, gambling, multi-level marketing (pyramid schemes), or new, unproven crypto are looking to win big with low effort. Rarely do we ever win big with little work. But there are alternatives to these schemes. You can spend time investing in dividend stocks earning monthly, quarterly, or yearly money just for owning a stock. You could also invest in an ETF where much of the work is done for you already, and watch your portfolio grow.
There are many alternatives to these get-rich-quick schemes. Investing can be fun, but it should be done responsibly, and it takes time to see results. Instead of spending time hoping you win the big one, or one day suddenly becoming a millionaire like you’ve always hoped, you can spend your time learning about finances, becoming financially literate, and helping others to do the same.
You can view our episode of the Freedom Finances Show where we discuss this same subject, below.
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