What’s the Catch?

My ~~high yield~~ online savings account at Marcus now pays just 0.6% annually in interest. If the Fed continues to keep short-term rates at 0% for the next few years it wouldn’t surprise me to see the yield on my savings drop even further.¹

The current level of interest rates has caused me to rethink the amount of money I keep in my savings account. I’m not going to take risk with any short-term goals with that money — things like vacations, house down payments, etc. — but I now have a threshold where once my general savings account hits a certain level, I move it out and invest it elsewhere. Otherwise I’m just losing money to inflation.

I’m fine taking more risk with money I don’t have earmarked for future spending goals because I have other financial backstops but I may not feel this way if rates were higher.

There are, of course, trade-offs with this approach. Anything with higher yields right now involves either more risk or more volatility.

And those risks extend beyond simple market and economic dynamics. Often times there are hidden risks when chasing yield.

A story on CNBC this week highlighted one of these hidden risks. A company called Beam Financial had been promising yields as high as 7% on your savings in ads all across the web. The firm was launched in 2019, promising the “first mobile high-interest bank account designed for the 99%.”

Now people who handed over their savings can’t get their money back:

A joint investigation by CNBC TV and CNBC.com has found that Beam Financial is having trouble processing customer withdrawals. Some users CNBC spoke with say their withdrawal transactions have been pending for months and that repeated attempts to get answers and updates from Beam have either gone unanswered or were not useful. Many of these email and text updates from Beam put the blame on the company’s bank partners or vendors.

CNBC profiled a number of Beam clients who tried and failed to get their money back from their savings accounts. It was unclear from the story if this is simply a liquidity mismatch or a case of fraud.

You should always proceed with caution when any financial institution offers higher than market interest rates but now more than ever this is the first question you should ask yourself when promised higher yield on your savings:

What’s the catch?

There’s always a catch with higher yields because the only safe government paper right now offers ridiculously low interest rates (which could be with us for a number of years).

The catch could be higher volatility, a greater chance of large losses, impaired liquidity when you need access to your funds or the possibility you are being scammed.

If you can earn more than the risk-free rate right now there is a good chance you’re taking more risk one way or another.

Yield-chaser beware.

Further reading:
The Reach For Yield: Is It Really Worth It?

Now here’s what I’ve been reading lately: