Not long ago, managing personal finances often meant balancing a checkbook, working through calculations by hand and updating a spreadsheet at the end of each month. Today, financial technology gives people a much clearer and more immediate view of their money. Consumers can monitor spending as it happens, automate savings, keep track of investments and use forecasting tools to explore how decisions they make today could affect their finances in the months or years ahead.
Technology gives individuals access to large amounts of information when making financial decisions. This is especially important when people can no longer rely solely on past spending to manage their finances and must estimate and track future expenses.
From Simple Tracking to More Personalized Planning
Of course, personal finance technology initially only organized information. It made it possible to switch from manually preparing and tracking personal finance spreadsheets to using a simple app. However, financial technology has long since advanced beyond that.
Of course, financial tools can do much more than simply track spending. Many can compare savings strategies, forecast how changes in income or expenses could affect a budget and help people understand the longer-term consequences of different financial decisions. Some tools, including an AI financial advisor, can also help users explore different scenarios and see how decisions involving savings, spending and other financial goals may interact over time.
Until recently, people generally made financial decisions in isolation. Now technology can model the interplay between different financial goals. For example, using historical data on a user’s spending and income, an AI financial advisor can estimate how increasing retirement contributions might affect your ability to save for other goals.
Additionally, more personal finance tools can provide more personalized advice based on users’ spending, income, and goals. The quality of the advice these tools provide can vary, and not everything a tool recommends will suit every individual. However, the recommendations are generally more relevant than those from a one-size-fits-all tool.
Financial Information Is Becoming Easier to Understand
For most people, making sense of financial information is probably the hardest part of managing their finances. With accounts, cards, credit, investments, loans, and bills spread across different institutions and, often, different locations, tracking everything is difficult and time-consuming.
By aggregating information from accounts an individual may have kept separate, many digital tools have made tracking and managing personal finances much easier. Individuals can now track monthly spending, how much they have in savings, and even get reminders about bills due soon.
A chart showing how discretionary spending has risen gradually over the last six months is far easier to understand than sifting through individual transactions. But technology cannot make the actual decisions regarding a person’s finances.
Viewing your financial information as a chart or graph can help you understand spending trends and spot where you are spending more than you thought. Small increases in spending on subscriptions, food, transportation, and other recurring expenses can add up over time and make it harder to meet your financial goals.
Scenario Planning Is Becoming More Practical
Financial planning is complicated, and in most cases there are no easy answers. How will income change over several months? How much would you need to cut from your regular expenses to save more? Will increasing your contributions to your retirement fund negatively affect other goals?
In the past, people manually changed numbers in a spreadsheet to work out different possible outcomes for their financial situation; today, many online personal finance tools can model different scenarios in a matter of seconds.
For individuals with variable income, modeling different income scenarios helps them plan for the highs and lows of their cash flow. For example, a self-employed individual or small business owner can set up scenarios to model the effect of a strong quarter versus a weaker one. This approach helps them prepare for different possible income scenarios and make informed decisions regarding their financial goals.
However, another crucial aspect of long-term financial planning is also increasingly supported by digital tools: scenario planning for financial goals. This could help someone considering a move, a career change, or a major purchase, for example, plan the financial implications for their cash flow over the short and long term and understand the trade-offs involved in different choices.
Automation Can Reduce Routine Financial Work
Financial technology also enables automation, as computer programs can now process previously time-consuming financial work in the background.
Automating routine transactions helps individuals save time and reduce the effort needed to stay on track with financial goals. For example, funds can be automatically transferred into a savings account, payments can be scheduled, and bills can be paid automatically on time.
Also, saving money automatically regularly can help build a consistent savings habit. For example, people who try to save whatever is left at the end of each month are often surprised to find little or nothing left. On the other hand, people who set up their accounts to transfer a specific amount to their savings accounts shortly after they are paid tend to save consistently.
Automated financial systems do, however, need occasional review. The user’s income and expenses have likely changed over the past year, as will their financial objectives. So what worked twelve months ago may no longer be appropriate today. Even routine payments, such as direct debits and standing orders, transfers to and from accounts, investments and Bennett salaries, and receipts of benefit payments, should therefore be checked from time to time.
Technology Still Requires Human Judgment
In recent years, many financial tools have become so sophisticated that users often treat their outputs as absolute certainties and therefore need to use them with caution.
When using financial software, remember that the programming is built on assumptions about the information you provide. These programs attempt to reveal certain patterns or even demonstrate the possible consequences of some of your current methods of handling your finances.
Financial software can recommend financial decisions, but that does not mean it is 100% right. Users need to understand the underlying assumptions and apply their own judgment.
Finally, consumers need to understand the privacy and security policies of any financial service provider. Even services that provide the best financial decision-making support are useless if your financial information is compromised.
A More Flexible Approach to Financial Planning
Most importantly, technology has made financial planning more flexible. As a result, plans that were once reviewed only once a year can now be updated regularly.
Financial planning is no longer something you set up once and never change again. It can be reviewed and adapted as soon as new information emerges or circumstances change, such as income changes, new bills for a new home, or shifting savings goals.
Financial planning is therefore becoming more flexible and dynamic, allowing adjustments and updates along the way.
As technology improves and more tools emerge to track, manage, and plan finances, managing personal finances will likely evolve further, become more interactive, and focus more on individual needs and circumstances.