You've heard the stories of Bernie Madoff and how his victims lost all of the wealth they worked so hard to accumulate. You wonder how people could fall for his Ponzi scheme. But the sad truth is that it is very easy to fall prey to a Ponzi scheme.

The reason for this is because of greed. We want it all. And we try to find the easiest path to get there. Unfortunately, the easiest path is usually the one that makes someone else rich while we lose our money.

But there are things you can do to protect yourself. And the best thing you can do is to be able to spot a Ponzi scheme right away by being aware of the signs. Then you know to avoid it. So let's get started with helping you to keep your money safe.

What Is A Ponzi Scheme?

Before we can spot a Ponzi scheme, we need to know exactly what one is. At its most basic level, a Ponzi scheme is an operation where one person promises high returns to investors. To achieve these high returns, the person running the scheme uses new investors money to pay the return for current investors.

For example, let's say I was the leader of a scheme and am promising a return of 20% annually. I get you to sign up and you hand over your money for me to invest it for you. I then get your best friend to sign up.

I take his money and pay you your 20% return. When I sign up another person, I take their money and use it pay your friend his 20%. As more and more people sign up, the scam continues.

Understand though that the paying of earnings is all done on paper. I don't physically give you your 20% each year. Instead I draft a statement of your account and show you that you made 20% even if you never did.

The reason this works is because most people will not sell out of an investment that is “earning” 20%. They will keep their money invested in the hopes of earning 20% in the coming years.

So while you and the other investors are excited about how much money you think you are making, I am taking all of your money and living life to the fullest.