AI’s Role in Personal Finance: Practical Yet Imperfect

When you ask an AI chatbot for basic advice, like reviving a wilted tomato plant or picking a movie, mistakes are minor. But financial decisions carry higher stakes. Still, AI is becoming more popular in personal finance.

According to a study by JD Power, 40% of 4,000 respondents used AI for financial help in recent months. Of those, over a third found its advice useful, similar to the help they received from banks.

Practical Uses of AI in Finance

David Kendrick, an IT manager from Dayton, Ohio, frequently consults ChatGPT, calling it ‘Chatty.’ He seeks advice ranging from managing his home equity credit to investing salary increases. Chatty advised him to invest more of his income in his Roth IRA, which he did. Although Kendrick visits a human adviser yearly, he values the ongoing access AI provides, helping to ease his financial worries.

‘I’ve always had some anxiety because my parents struggled financially,’ Kendrick said. ‘This access helps me feel more secure.’

The JD Power survey found that the largest group using AI was labeled ‘overextended’, meaning they might have tight budgets and some debt. These users typically ask AI how to maximize limited resources, receiving tips like buying generic brands to save money.

AI’s Strengths and Limitations

Taha Choukhmane, an associate professor at MIT Sloan School of Management, co-authored a paper showing AI gives solid broad economic advice. It encourages more saving, stock market participation, and safer investments with age.

This research involved 1,000 adults writing prompts for AI and simulating lifetime effects of AI versus non-AI-advised actions. Those following AI advice generally saved more. However, AI’s complex advice sometimes diverged from human experts, especially in handling job loss. It recommended severe spending cuts without suggesting tapping into emergency savings. The study also noted AI suggested riskier strategies for men than women.

The Importance of Informed Use

Experts recognize AI’s usefulness for basic and highly detailed finance questions. But it can err with mid-level sophistication questions. Danielle Harrison, founder of Harrison Financial Planning, tested AI about business structuring. Initially, AI strongly recommended forming an S corporation but changed to an LLC after receiving more information.

Harrison noted that AI might mislead those without her financial background, due to ‘hallucination’—when AI creates sources or incorrect assumptions.

Sharon Bloodworth, CEO of White Oaks Wealth Advisors, finds AI often inaccurate but acknowledges its potential to democratize financial advice for those without access to human advisers.

Kendrick remains cautious, feeding AI only copies of his financial information, and critiques its overly agreeable feedback. ‘I challenge it to be honest,’ Kendrick said.