You’ve probably heard about Bernie Maddoff.  He just went to jail for creating a 50 billion dollar Ponzi scheme and will spend the rest of his life behind bars.

In case you don’t know what a Ponzi scheme is, here’s a quick overview:

Investors are enticed to put up money based on the promise of above average returns.  The promoter gives a good sounding story about how the returns will be generated.  People hear about the rate of return and want to join. 

The reality is there is no investment.  The first investors get their money from the investments made by later investors.  Eventually the scheme, or pyramid, collapses.

Bernie’s story made all the newspapers but the truth is this process gets played out everyday in a much smaller way. 

Lets say you get a credit card and you make a few purchases.  When it comes time to make the payment, you only make the minimum.  You keep that up, paying the minimum payment each month.  Then something happens, maybe you lose your job or your expenses go up.  You don’t have the money to make even the minimum payment. 

Fortunately, you have another credit card that allows for cash advances.  You take an advance and make a payment on the first card. 

Next month, still no money so there’s another advance.  Only this month you now have two payments – 2 credit cards. 

You can see where this is going.  Unless you increase your income or reduce your expenses, you’ll never catch up.  In which case, I hope you know a good bankruptcy attorney.

Two lessons from all of this: 

First:  Be sure you manage your debt appropriately so you don’t end up in this situation. 

Second: The US government is giving away billions as part of a stimulus plan.  Next year’s deficit is estimated at 1.5 TRILLION DOLLARS.  Estimates for the next 10 years show budget deficits every year … Even with significant tax increases.  My reading of this says the only stimulus available to small business is the one we create for ourselves. 

NOW is the time to start your own business. 

NOW is the time to set it up properly.

NOW is the time to be sure it’s run for extremely high profits and sustainability. 

The government may be there to help us out, but I’d rather be prepared to provide my own bailout. 

How about you?

Written by Philip Cohen