Consumers in every generation, from millennials to boomers, are worrying about their financial health more than ever. They have serious reasons to be worried: according to Bankrate 65% of Americans save too small or nothing. There is so much information out there to guide Americans through how to make more, save more, spend less, and actually be able to retire at a reasonable age, but most of these advice (not even mentioning that there is so much noise compared to real signal) makes consumers increasingly frustrated with the multitude of tools available and also distracted from focusing on a specific financial goal.
Our world is distracting. Budgeting apps don’t work.
Americans feel comfortable using the traditional personal financial management tools that have proliferated during the past several years. Nearly 1 out of 5 adults in the US use at least 1 budgeting app. The problem with those apps/tools is that they are static: they depict a great snapshot of the users “financial past”. These personal finance management tools are concentrated on “remembering and fixing” what’s going on with your money, but not assisting you in the decision making process: for instance giving you personalized advice about where to go next to pile up wealth and make it grow.
In this distracted world, our brains are influenced to spend more and more. It can be difficult to monitor our spending habits and see how they impact our overall financial health. With traditional personal financial management tools, consumers can see how much money they’ve spent or what’s left in their bank account. But the problem is that those numbers don’t necessarily incentivize them to change their habits and discipline to control their personal finance.
Lack of money is not the problem. The problem is the lack of financial discipline. If you lack it you will always struggle with money whether you make $10,000 a year or $100,000 a year.
People need to put efforts to cope with the lack of financial discipline and to get the benefits of these budgeting apps — the apps give you the data, but the hardest part is to make the decision and take that next step.
Transforming personal financial management with AI
Artificial intelligence (AI) has come a long way in recent years and promises to transform how we work and live. From transportation to healthcare to self-driving cars — everywhere you can see AI applications, which make decisions on behalf of humans. We’re already starting to see the potential of this groundbreaking technology.
In finance, AI has been quietly working behind the scenes to transform the industry. Banks are already leveraging AI mostly for 2 broad purposes:
- When it comes to processes, banks use AI to automate routine and repetitive processes and optimise internal workflows.
- When it comes to the customer, banks use AI to better engage the customers by helping people make smarter decisions related investments and better decisions when it comes to managing their money.
One of the most promising areas for AI emergence has been in the realm of personal finance. In the US living paycheck-to-paycheck is rapidly becoming the norm for a lot of people. Nearly half of Americans (49%) say they spend more than they can reasonably afford. Using predictive technology to analyze spending habits and to provide valuable advice has the potential to change American’s lives.
It’s not the money, it’s what you do with it that counts.
Through the use of advanced data processing, personalization, and intelligent decision making, AI based platforms are aiming to help users manage and build their wealth.
These are just a few of the ways AI is helping consumers:
- Identifying potential saving opportunities. When we shop, we’re basically creating data and this information has been leveraged by advertisers and retailers for many years to entice and sell products. However, this same data can also be leveraged to analyze our activities and identify potential opportunities to save money. Besides identifying the opportunities they can also automatically save money based on our financial situation. This is essential for people trying to save up for a down payment on a home, a business, or another expense.
- Personal assistants. Some banks and fintech startups have created tools that can come in the form of solid advice from an AI financial assistant, which can engage in human-like intelligent conversations. Some have even gone a step further — you can quickly start feeling like you’re discussing your personal financial matters with a friend. Eventually they are offering AI-driven personal assistants that make it easier to accomplish daily financial tasks, from paying bills to managing online accounts and even alerting the overspending and recommending on what unnecessary things you should not spend money during the next few days or next weekend.
- Risk managed investing. Many banks and startups have left footprints into the realm of digital platform-based financial advisory and investing. These tools are widely known as “robo-advisory” or “robo investing” tools. The idea behind robo-advisory investing is that they use data and algorithms to simplify the investment process. They are using technology to build wealth-creating and risk-managed investment portfolios with little or no human interaction. So if your life could be busy with a growing family or a busy job that impede you to pay close attention to your personal finances, a robo-advisor could also be for you.
And there are some clear benefits on why so many entities are relying on AI to provide personal finance management related services to their users:
- Objective decision making. Humans are subject to emotions and biases, and also the attention span of an average person has decreased sharply during the past decade: these factors affect our decision making. In general, the best financial decisions are the most objective ones, since the end goal is based on numbers and calculations. AI algorithms aren’t subject to human emotions, and won’t become a victim to the way of thinking like “few dollar here and there won’t matter”. This makes them more capable for long-term objective decision making.
- Super-fast data processing. Machines can also gather, interpret, and make sense of far more data at once than a human can. It’s true that AI has yet to reach a “general intelligence” to be able to outperform the human brain. But when it comes to incorporating thousands of variables on specific area (like personal finance) and analyze them, AI systems simply can’t be beat. This is especially important when studying complex economies and companies within them, financial flows of millions of people etc.
- Exponential potential improvements. Finally, AI systems have the potential to improve, and possibly improve without any limits. As a human, your own knowledge and experience will grow slowly and linearly, but the AI systems you use to make decisions will likely grow at a faster rate.
There are also some clear disadvantages to relying on AI in the personal finance (customer overconfidence, potential manipulations), but the same can be said of any technology. But AI is only going to get better over time (so long as we allow it to self-improve). That doesn’t mean you should put your full faith in finance on AI tools, but that doesn’t mean you should ignore them either. Instead, as consumers, we need to be prudently aware of the complexities of the technology, and perceive that it keeps improving so as we use it the best we can.
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How AI can help you get out of “personal finance management” trap was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.