Cash Club: Pyramid schemes

In Cash Club, Latest by Njabulo Nsibande

It seems like every year comes standard with a new pyramid scheme. The most recent is the “WhatsApp stokvel”, where you contribute R200 and get R1,200 in a relatively short period. The catch is that you need to recruit other people to join your WhatsApp group.

A pyramid scheme is, by definition, an “investment” that depends on new “investors” as a driver of return. Essentially new investors pay old investors. This works fine until there are no new investors. Then it collapses very quickly.

My issue, in this case, is a matter of principle. Schemes like this exploit financial illiteracy, which is a huge problem – especially in our country. As far as education is concerned, we take one step forward and a hundred back. A step forward, in this case, is being able to “sacrifice” what you would otherwise spend on drinks or a takeout meal. A hundred steps back is being convinced that get rich quick schemes actually work. Why a hundred steps back and not two or three? Because the consequences of these scams when they fall apart are usually huge. Look at the infamous MMM Ponzi scheme, for example. It did “work” initially and it started with “negligible” amounts. What happened eventually? Well, it ended with a lot of people losing a lot of money.

The R200 WhatsApp stokvel magically turns R200 into R1,200. It’s only a matter of time until the investment amount is stretched to R2,000 to return R12,000, and eventually, life savings to be turned into tears.

These schemes also prove that “too broke to save” or “earn too little to save” is a myth and/or excuse. It shows that we have it in our budgets to pay ourselves first.

Njabulo Kelvin Nsibande

Njabulo Nsibande is a Just One Lap user-turned-contributor and a founding member of an investment club. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.

Follow Njabulo’s journey here every month. You can also follow his trading journey by listening to his Village Trader podcast.

Find him on Twitter: @njabulo_goje.

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