Did you know that by 2022, 46% of financial businesses worldwide were already using AI tools? And it's not just companies—AI is also making waves in personal finance, especially among younger generations. According to a 2024 report by Experian, 67% of Gen Z and 62% of Millennials are using AI to help manage their finances.
This shift is no surprise, given how quickly AI is transforming the way we budget, invest, and plan for the future. From tracking expenses to making smarter investment decisions, AI tools are becoming an essential part of financial management. But as with any new technology, both opportunities and challenges exist.
In this article, we'll explore how AI works in personal finance, the pros and cons, potential risks, and tips on how to use AI to improve your financial health.
What is AI in personal finance?
AI in finance leverages sophisticated algorithms and data-driven insights to automate processes and enhance financial planning, making it easier for individuals to manage their finances more efficiently.
While people use these technologies for personal financial management, financial professionals are also incorporating AI into their practices. “Currently, most financial advisors are finding what their client's top-performing assets are in their portfolio by running reports and then interpreting them,” says Shane Cummings, wealth advisor and director of technology/cybersecurity at Halbert Hargrove. “An AI agent could potentially pull up that data, too.”
One important part of AI in finance is machine learning. AI processes large amounts of financial data and identifies patterns to predict future trends or behaviors. This means the more data these systems are exposed to, the better they become at predicting outcomes.
For example, machine learning algorithms can analyze your spending habits to offer personalized budgeting tips, predict your future expenses, and even alert you to any financial risks based on past behavior.
Another significant component is generative AI in finance, which can create customized solutions, such as developing financial plans tailored to your specific needs or crafting investment strategies based on your goals and risk tolerance.
AI and finance: Breakdown of its applications and benefits
From budgeting to investment management, AI offers a range of tools that enhance financial decision-making, simplify routine tasks, and help individuals make smarter, more informed choices. These tools provide benefits like increased personalization, efficiency, and accessibility, all while helping reduce risks like fraud and errors.
Let’s explore the main AI applications in finance and understand how it can improve your financial life.
1. Budgeting and expense tracking
AI-driven tools, like Mint and YNAB (You Need a Budget), are revolutionizing budgeting and expense tracking by analyzing your spending patterns and categorizing expenses automatically. These apps use finance AI tools to give real-time insights into where your money is going, making it easier to spot trends, cut back on unnecessary expenses, and adjust your budget.
One of the biggest advantages of these AI finance tools is personalization. For instance, PocketGuard can suggest tailored budgeting strategies based on your spending habits, helping you save more, stick to your financial goals, set aside money for emergencies, or simplify planning for life changes. “For example, you could update your financial plan by adjusting your retirement timeline or altering cash flow needs, such as reducing annual expenses by $10,000,” Cummings says.
Plus, these tools save time by automating the tracking process, so you don’t have to manually input expenses or receipts. This makes managing your finances more accessible, particularly for those who may not have the time or expertise to create detailed budgets and complex spreadsheets on their own.
2. Investment management
Robo-advisors use sophisticated algorithms to help you manage your investments without a human advisor. These platforms automate portfolio management, optimizing your investment strategy based on risk tolerance, goals, and market conditions.
Generative AI for finance also plays a role in investment management by analyzing financial trends and market data to generate predictions about stock movements or economic conditions. “AI could also be used to see how the performance of one's portfolio compares to the returns of the S&P 500 over the last two years,” Cummings says. “You could ask AI to pull that data and put it into a chart to make it easier to view.”
This technology allows individuals to make smarter decisions about where to allocate their investments, providing access to personalized investment strategies that were once only available to high-net-worth individuals. AI-based tools can also help mitigate risk by diversifying investments and detecting potential market downturns early.
3. Fraud detection and security
AI is increasingly being used to fight financial fraud by monitoring transactions and detecting unusual activity in real time. AI in banking and finance systems can flag potentially fraudulent transactions based on patterns in spending behavior, geographical location, and even the time of day.
For example, if your bank account suddenly shows multiple large withdrawals in a short period, AI systems can automatically alert you to review the activity, helping mitigate risks. These AI systems improve the overall security of financial transactions, offering peace of mind to consumers and businesses.
4. Credit scoring and loan approvals
AI is also being used to improve the accuracy of credit scoring and loan approvals. Traditional credit scoring models rely heavily on historical credit behavior, which can leave out important factors or be biased against certain groups. However, AI in the finance industry can analyze a broader range of data—such as income, spending patterns, and even social behavior—to assess an individual’s creditworthiness more accurately.
5. Tax preparation and accounting
Using AI in accounting and finance can simplify tax processes that once required hours of manual work. Tools that leverage AI like QuickBooks and Vic.ai can automate bookkeeping tasks, categorize expenses, and even generate tax reports.
For individuals or small business owners, AI-powered accounting tools provide personalized advice to help maximize deductions, reduce errors, and stay compliant with tax regulations, ultimately reducing the stress of filing taxes.
Challenges and risks of AI in personal finance
While AI in personal finance brings numerous benefits, there are also challenges and risks that users must be aware of. As with any technology, AI tools for finance aren’t perfect, and understanding potential pitfalls is essential to make the most of them without falling into avoidable traps.
Overreliance on AI
AI-driven financial tools can be incredibly efficient, but one major risk is overreliance on automated decision-making. Algorithms also can make mistakes by giving incorrect answers.
“If you are thinking about using an AI tool to change your investments or make new investments, consider that there are many well-documented circumstances in which AI tools give incorrect information,” Cummings says. “We are already seeing some signs of this as the U.S. Securities and Exchange Commission (SEC) censures some firms regarding their use of AI and also in other industries, such as attorneys citing court cases in their arguments that are ‘hallucinated’ by AI and then not fact-checked.”
It’s crucial to double-check any major financial decisions suggested by AI-based tools, such as investments or portfolio adjustments, to ensure they’re grounded in accurate data.
Data privacy and security
With AI tools in finance, there’s an increased risk of sensitive financial data breaches. AI systems process vast amounts of personal information, making them attractive targets for cybercriminals. To mitigate this, Cummings recommends that users carefully review the privacy policies of AI-powered services. Ensuring the platform you’re using follows strong encryption protocols and data protection practices is key to safeguarding your financial information.
For added protection, consider using two-factor authentication (2FA) and only work with reputable platforms. Regularly monitor your financial accounts for unusual activity and avoid sharing sensitive data unless absolutely necessary.
Ethical concerns
As AI adoption grows in the finance world, ethical concerns are becoming more prominent. One of the primary issues is the potential for bias in AI algorithms, which can lead to unfair outcomes, such as biased credit scoring or loan rejections. For example, AI systems may inadvertently favor certain demographic groups over others if the data they are trained on reflects historical biases.
Another ethical concern is the transparency of AI decision-making. As AI systems become more complex, it can be difficult for users to understand how decisions are made. “Using AI without the appropriate guardrails in place could lead to some serious investing mistakes, could harm investors, or even worse, cause additional volatility in the financial markets that would not otherwise be there.”
Cost of advanced AI tools
While many AI-driven finance tools are accessible and affordable, more advanced AI solutions can come with a hefty price tag. Some AI platforms cater to businesses or high-net-worth individuals, offering more sophisticated services like custom financial modeling or market analysis. This can be a barrier for individuals who want to take advantage of AI’s capabilities but can’t afford the higher-end tools.
How to safely use AI in personal finance
AI tools can be very helpful for managing your finances, but to use them effectively, you need to approach them with caution. Here are some practical tips to help you harness AI while safeguarding your financial health.
Research and choose trusted AI tools
Thoroughly research AI tool options and read the security policies before adopting one. “Is the information you share with the AI used to train its models? If so, you need to worry that any personal details you share, such as account titles, account numbers, balances, etc. could potentially be shared with the large technology companies behind the scenes,” Cummings says.
Most reputable AI tools come with positive reviews, certifications, or endorsements from financial professionals, and will have an information page that describes how they use your personal data.
“The best policies will state that they don’t retain your information to train AI models or share your data with developers,” Cumming says. “You should always think about where your data is going and who it’s being shared with. If a site is unwilling to share its AI data security policies or doesn’t have one posted, you should be very skeptical of using it.”
Complement AI with human judgment
AI can process data quickly and offer insights, but it isn’t infallible. Combining AI with human expertise is essential to making well-rounded financial decisions. “AI can’t currently differentiate between good and bad financial advice,” Cummings says. “The context is very important in determining the best approach to any given financial issue.”
Consulting with a Certified Financial Planner (CFP) or financial consultant can help you sift through AI-generated recommendations to determine what’s truly relevant to your situation. Financial professionals can account for personal factors—like your long-term goals or emotional relationship with money—that AI might overlook.
Regularly monitor your finances
AI tools can help track spending, savings, and investments, but it’s still important to monitor your accounts manually. Errors can happen, whether due to algorithmic glitches or misinterpreted data. Regular reviews keep automated processes aligned with your financial goals and provide an opportunity to catch any inaccuracies early.
If an AI tool is helping you budget or invest, double-check the results periodically and adjust as needed. Being proactive can help you avoid costly mistakes or missed opportunities.
Learn the basics of personal finance
Even with the best AI tools, a solid understanding of personal finance fundamentals is invaluable. Knowing the basics helps you interpret AI-generated insights and identify potential errors. AI tools are most effective when paired with an informed user who understands their capabilities and limitations. Resources like financial literacy courses, books, or consultations with professionals can help you build this foundation.
AI can help you manage your money
AI is transforming the way we manage our personal finances, offering tools that make budgeting, investing, and even fraud detection more accessible and efficient. By automating routine tasks and providing personalized insights, AI empowers individuals to make smarter, data-driven financial decisions.
However, it’s essential to use these tools with caution and responsibility. “Until AI hallucinations can be solved, I would be uncomfortable letting AI or an AI agent make investing decisions or trades,” Cummings says. This underscores the importance of using AI as a supplement to human judgment rather than a replacement for it. When AI tools enhance the efficiency of financial professionals or streamline tasks like data analysis, they can significantly improve financial management without compromising safety.
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