In its simplest form, a personal Ponzi scheme is borrowing money to pay debt service: acquiring new debt to pay old debt. It’s a path to disaster.

What is a personal Ponzi scheme? Aren’t Ponzi schemes the advanced financial management crime of sophisticated money managers like Bernie Madoff? Not really. A Ponzi Scheme is any investment where the returns come not from the investment but from the capital contributions of new investors. If you change the terms slightly, a Ponzi Scheme is also any debt where the payment of debt comes not from wage income but from borrowed money from new lenders. In that respect, personal Ponzi schemes are easy to begin and grow. Anyone can borrow money to pay debt, right?

Many novice investors and ordinary people recognized the Ponzi scheme embedded in mortgage financing during the housing bubble. Any lender who bothered to look observed the rapid increase in personal debt from serial refinancing, but they profited so handsomely from this activity that most lenders willfully ignored the troubling signs.

Prudent lenders would never extend credit to borrowers increasing debt levels every year because it’s a game of musical chairs they don’t want to lose. The greatest fool, the final lender in the Ponzi scheme absorbs a tremendous loss. However, during the housing bubble, lenders didn’t care. They mistakenly believed the value of the home would always rise enough to cover the debt, so they turned a blind eye to the obvious and gifted free money to millions of Ponzis.

Even now lenders seek to enable Ponzi borrowing. Lenders bring borrowers to a boiling point where the borrower is churned with fees and drained with interest. Borrowers tread water in this boiling froth partially submerged for their entire working lives. It’s hell on earth, in my opinion.

Neal Gabler

The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew? Well, I knew. I knew because I am in that 47 percent. I know what it is like to have to juggle creditors to make it through a week. I know what it is like to have to swallow my pride and constantly dun people to pay me so that I can pay others. I know what it is like to have liens slapped on me and to have my bank account levied by creditors. I know what it is like to be down to my last $5—literally—while I wait for a paycheck to arrive, and I know what it is like to subsist for days on a diet of eggs. I know what it is like to dread going to the mailbox, because there will always be new bills to pay but seldom a check with which to pay them. I know what it is like to have to tell my daughter that I didn’t know if I would be able to pay for her wedding; it all depended on whether something good happened. And I know what it is like to have to borrow money from my adult daughters because my wife and I ran out of heating oil.

Many people live beyond their means and scramble to pay the bills. When they discover they can borrow money to pay debt, they are on the path to starting a personal Ponzi scheme.

Going Ponzi

Going Ponzi is not usually a conscious decision. Generally, it creeps up on people in small incremental steps. Ponzi slowly seduces by offering tempting pleasures—the devil in disguise. Each step into the trap of Ponzi offers rewards, but like the La Brea tar pits attracted predators to trapped prey, Ponzi clamps a death grip on all who enter.

My revulsion toward debt comes from personal experience. I know the evils of debt first-hand. Let me tell you about my own personal Ponzi scheme.

I remember my first introduction to Ponzi. A brash young man in my real estate development program in college was a born entrepreneur. He mowed lawns for an entire summer to pay for an option contract on a piece of land for a small deal. He was the one who first suggested to me that I take the cash-advance checks from one credit card to pay another, possibly in cryptocurrency, through payment gateways like Flexipay. I was floored. I was in my mid 20s, and it didn’t occur to me that I could do that. Since it came from an guy I perceived to be a finance genius, I thought it was a great and sophisticated financial management tool—but I didn’t jump in right away.

I remember my first taste of Ponzi. I was finishing my education when I embarked on a doomed entrepreneurial adventure. There was a six-month period where I was working many hours without pay as entrepreneurs do, and I didn’t work enough paying hours to cover my costs. When I considered my dilemma, the correct decision was to work more paying hours, but the decision I made was to go Ponzi.

I remember my first comfort of Ponzi. That first month after going Ponzi, my stress level dropped significantly. I suddenly had all the money I needed to focus my efforts on starting a new business. Hell, I quit that stupid job at the computer lab! I had thousands of dollars before I reached my credit limit, and I wasn’t falling behind that quickly; besides, I was going to be rich soon. I felt very peaceful.

I remember my first feeling of the sophistication of Ponzi. Since I was now accumulating and storing debt like I used to accumulate and store savings, I needed new tools. After a few months of juggling credit card bills, I came across the advanced technique of low-interest balance transfers. Storing my debt on low-interest credit cards seemed like wise financial management. It was wise. I was a genius. I was as sophisticated as those cool people on TV who pull out their American Dumbass cards.

I remember my first worry about Ponzi. As the pile of debt grew, I felt the weight of Ponzi. When I first glimpsed the event horizon of the abyss—the credit limit—a small twinge of regret and worry signaled my upcoming doom, but it was a minor worry, easy to ignore. A quick glance at the remaining credit limits on the six other credit cards showed me I need not worry.

I remember feeling pwned by Ponzi. For many years, I danced with Ponzi. My debt service was a manageable amount of my income, but a significant percentage needed to go out each month. What made matters worse, there wasn’t much room in the budget to pay off the debt in a reasonable timeframe—or so I thought. In reality, I didn’t want to give up my entitlements. Since paying off Ponzi seemed hopeless and painful, like many others, I chose to dance in the debt meat grinder.

I remember choosing not to live Ponzi. At some level, I knew I was carrying a crushing weight, but denial prevented me from doing anything about it. A small voice inside of me cried out, “enough.” I set my intention on purging Ponzi debt from my life. The decisions that followed both big and small were guided by my intention, and they lead me to a life without Ponzi debt.

I remember the freedom of releasing Ponzi. I wish I had a great story of personal sacrifice, but I don’t. I received outside help, and thanks to the housing bubble, I found good paying work that enabled me to pay off a few remaining debts. Fortunately, I was disciplined enough from my fear of Ponzi to stop using credit at all. It is a healthy fear I still carry with me. Once I had purged Ponzi debt from my life, I freed up all of my income. I lose no energy to the past, a wonderful feeling of freedom I enjoy to this day.

Who is serving who?

Borrowers believe lenders provide them a service, but in reality, borrowers bow down before their lenders, giving up control of their own lives when they take on debt. The debtor diverts their money toward paying for the past rather than investing for the future. Borrowing is a weakness, a crushing weight, a debilitating pile of paper detailing a life of servitude in exchange for a borrower’s entitlements.

Of course, most borrowers don’t see it that way: They feel powerful. Borrowers believe they are rich because someone was willing to loan them money; the more money people borrow, the stronger they feel but the weaker they become. Ponzi schemes of debt are the highest form of borrower sophistication (ignorance) and financial (mis)management. These structures take borrowers to the heights of borrower power and the depths of borrower weakness. The truly sophisticated live a simple life avoiding debt and enjoying freedom provided by savings.

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