Introduction

Managing personal finances refers to the process of planning and managing the financial aspect of one’s life. Most people struggle with managing their personal finances efficiently due to lack of financial knowledge and the complexities associated with it. The financial aspect includes 5 main activities which are: income generation, saving, investment, spending, and protection. Previously, one needed to have a comprehensive budget and extensive knowledge of investing and saving. This made managing personal finances a daunting task. However, the rise of AI-powered financial management applications has simplified the process.

Financial Activities

1. Income

Income refers to the cash flow received from one or more sources such as salaries, dividends, pensions, etc. This income is then used for other financial activities such as investing, saving, spending and protection. Therefore, income is the first link in the chain of activities in personal finance.

2. Spending

Spending refers to money spent in the acquisition of goods, services, and consumables. Typical expenses include rent, food, entertainment, travel, and credit payments. Expenses can either be paid by cash or credit.

3. Saving and Investing

Saving and investing are only possible when there is a surplus between what is earned and what is spent. Money can be saved in savings bank accounts or as physical cash. Having too much money in savings is not ideal, because there are little to no returns on saved money. With saving, there is a high risk of buying power being eroded due to inflation.

Investments, on the other hand, involve purchasing assets with the expectation that they will increase in value over time. With investments, there is a risk of losing some or all of the original investment, but this can be mitigated if the investment is done wisely. They offer relatively higher returns in the case of a positive return. Some forms of investments include stocks, bonds, real estate, cryptocurrencies, etc. Knowing the best investment for one’s needs is one of the most important activities in managing one’s personal finances.

4. Protection

Personal protection involves subscribing to products that guard against unforeseen circumstances such as sickness. Typically, these products include medical aid, life insurance, motor, and home insurance, etc.

The Role of AI

Recently, there has been a gradual increase in budget management apps powered by machine learning. Through the power of machine learning, these apps are able to provide users with customised financial advice and guidance. One can link all their financial accounts, such as bank accounts and investment accounts, to these apps and easily track their financial activities. Some benefits of AI-powered apps are that they can identify spending patterns and help customers identify areas where they can save. These apps are able to categorise transactions based on the description of the transaction or the company to which payment was made. The apps are also able to use spending patterns to detect and flag irregular spending habits which can be typically associated with fraud. Fraud detection is a crucial feature, especially in South Africa where identity and financial theft is rampant.

The future of AI in personal finances can go as far as identifying consumers who are struggling financially by detecting decreases in income, increases in expenses, or low savings rates, and offering them financial advice. The future of AI-driven financial apps could also include providing guidance on financial decisions such as how quickly to pay off a mortgage versus how much to save or invest and when they should do so, and suggesting the best insurance policies for the user. By analysing your financial information, an application could recommend an investment that is applicable to you. This kind of functionality may eventually replace the financial adviser. Once you understand a person’s preferences and have all of the data, such decisions could be achieved with basic AI algorithms.

One of the major challenges with the growth of AI driven financial apps is whether the algorithms can interpret the human emotions that are involved in setting financial goals and making major financial decisions. It is also not easy for financial consumers to trust the algorithms to the extent that they place the fate of their financial futures in the algorithms. Another downside of these personal finance apps is that they are region based. One would not be able to link their South African bank account to an app that was developed for USA market.

AI Driven Personal Finance Apps

1. 22seven (South Africa)

22seven is a free budgeting and investment app from Old Mutual. 22seven helps you budget, track your spending on all your accounts and invest for your life goals.

2. Max (South Africa)

Max is an AI financial fitness coach that helps TymeBank customers learn about their money including how they can enhance their financial profile, improve their credit score, and get ahead using goal-based savings.

3. Olivia

Olivia is an AI-powered financial assistant that analyses spending patterns and recommends smarter ways of spending. Olivia also finds and offers discounts on your next purchases.

Conclusion

Artificial intelligence is a very powerful tool that has revolutionised several sectors, and the personal finance sector will not be immune to its effects. However, because of the shortcomings of AI in interpreting human emotions, it is unlikely that the human element would be completely replaced anytime soon. I believe the use of AI in managing personal finance will have a positive impact on how future generations spend, save and invest their money.