Should You Trust AI Financial Advice?

Artificial intelligence (AI) has been making headlines in recent months. As AI develops into a more sophisticated tool, it’s natural to wonder how this technology might impact financial advice. If AI can answer other questions, can it be trusted to provide worthwhile financial advice?

Let’s explore how AI interacts with financial advice.

Financial Advice and AI

The investment industry is working to harness the power of artificial intelligence in the financial planning space. With the help of generative AI, like ChatGPT, people can find answers to basic personal finance questions.

But the introduction of AI into the space is relatively new. As with anything new, there have been some bumps in the road. Not all ChatGPT answers about money are correct, and the question of personalization brings the value of a human advisor into focus.

Reasons to Trust AI Advice

AI financial advice is something new in the personal finance space. While there are certainly some questions, you can find reasons to trust AI.

Some Advice Is Straightforward

Some of the most basic money advice is straightforward. For example, you’ll likely find adequate advice on why you should save more money, build your credit score, or create a budget.

Of course, you might not need AI to tell you some of these basic principles. But if you need some advice about basic money concepts, you might find what you are looking for through an AI tool.

You Have Basic Financial Literacy Mastered

If you already have a basic understanding of financial literacy, then you might already have the language you need to pull correct answers out of an AI tool. For example, you might be able to find the contribution limits to your 401(k) through an AI tool. But if you aren’t sure what a 401(k) is or realize there are contribution limits attached, then you may not know how to find the answers you need.

Reasons to Not Trust AI Advice

Of course, there are also reasons to be skeptical of AI financial advice.

Not Always Accurate

Generative AI has the goal of giving you a plausible answer to your question. While you might find a possible answer, it’s not guaranteed to be the correct answer.

Lack of the Whole Picture

Financial management is a deeply personal experience. Everyone has a different financial situation and unique goals for their money. It’s impossible to convey your entire financial picture to ChatGPT, which means the tool lacks a complete picture of your finances. Without the right context, you will likely find blanket advice that may or may not apply to your situation.

A Look at AI Financial Advice

Without a few examples, it’s hard to understand how AI financial advice stacks up. In the sections below, you’ll find ChatGPT’s answers to several questions about personal finance and my opinions in response.

What Steps Should a 30-Year-Old Take to Plan for Retirement?

Planning for retirement is a key part of a healthy financial picture. Here’s what ChatGPT and I had to say about this big question.

ChatGPT’s Answer

“Planning for retirement is an important step to ensure financial security and peace of mind in the future. Here are some steps a 30-year-old can take to start planning for retirement:

1. Set clear retirement goals: Begin by determining the lifestyle you desire during retirement. Consider factors such as where you want to live, your estimated expenses, and the age at which you plan to retire. Setting specific goals will help you create a realistic plan.
2. Calculate retirement savings needs: Use retirement calculators or consult with a financial advisor to estimate how much you’ll need to save for retirement. Consider factors like inflation, healthcare costs, and the desired length of retirement.
3. Start saving early: The earlier you start saving, the more time your investments have to grow. Take advantage of compounding interest by contributing regularly to retirement accounts such as 401(k)s, individual retirement accounts (IRAs), or other employer-sponsored plans.
4. Maximize employer contributions: If your employer offers a retirement savings plan with matching contributions, contribute enough to receive the full match. It’s essentially free money that boosts your retirement savings.
5. Diversify your investments: Build a diversified investment portfolio that suits your risk tolerance and time horizon. Consider a mix of stocks, bonds, and other assets to spread out risk and potentially increase returns.
6. Manage debt: Aim to pay off high-interest debts like credit cards and personal loans as soon as possible. High debt levels can hinder your ability to save for retirement.
7. Educate yourself on investing: Develop a basic understanding of investing principles. Read books, take courses, or consult with a financial advisor to learn about different investment options and strategies.
8. Adjust your savings rate over time: As your income grows, aim to increase your savings rate. Regularly review your budget and find opportunities to save more money for retirement.
9. Consider tax-efficient strategies: Learn about tax-advantaged retirement accounts, such as Traditional and Roth IRAs, and explore strategies that can help reduce your tax burden in retirement.
10. Stay informed and review your plan regularly: Keep track of your retirement savings progress and make adjustments as needed. Revisit your plan periodically to account for changes in your financial situation, goals, and market conditions.

Remember, everyone’s financial situation is unique, so it’s beneficial to consult with a qualified financial advisor who can provide personalized guidance based on your specific circumstances.”

My Take

The answer provided by ChatGPT was surprisingly robust. With this ten-step plan, most 30-year-olds would be equipped to start saving for retirement.

I especially liked that the tool recognized that everyone’s retirement planning needs are different. With a wide range of individual circumstances, the tool advises savers to work with a human professional to nail down the details.

What Percentage of My Income Should I Save?

Saving money is a key part of building financial freedom. Here’s what ChatGPT and I had to say about this question.

ChatGPT Answer

“Determining the percentage of your income to save depends on various factors such as your financial goals, current expenses, and overall financial situation. While there is no one-size-fits-all answer, financial experts generally recommend saving between 10% to 20% of your income.

Here are some considerations to help you determine the appropriate percentage:

1. Financial goals: Consider your short-term and long-term goals, such as building an emergency fund, saving for a down payment on a house, or planning for retirement. The more ambitious your goals, the higher the percentage you may need to save.
2. Expenses and lifestyle: Assess your current expenses and lifestyle choices. If you have high monthly expenses, it may be challenging to save a larger percentage of your income. In such cases, you might need to prioritize budgeting and find ways to reduce expenses to increase your savings rate.
3. Debt obligations: If you have significant debts, such as student loans or credit card debt, it’s generally advisable to prioritize paying off high-interest debt before allocating a substantial percentage to savings. However, it’s still important to maintain some level of savings for emergencies.
4. Income stability: Consider the stability of your income source. If you have a steady job and consistent income, you may be able to save a higher percentage. However, if your income is irregular or uncertain, you might need to adjust your savings rate accordingly.

Ultimately, the percentage you save should strike a balance between your financial goals, lifestyle, and current financial obligations. It’s important to regularly reassess your savings plan as your circumstances change and to adjust the percentage accordingly.”

My Take

In terms of how much you should save, ChatGPT gives you a lot to think about. The answer kicks off with a general guideline of saving between 10% to 20% of your income, which is in line with what the Consumer Financial Protection Bureau and most experts recommend.

But the answer gives you breathing room to help you determine what the right percentage is for your goals. The recognition that your current financial situation and future financial goals have an impact on your savings decisions is an important message to get across.

Can I Afford to Purchase a House?

Homeownership is a significant financial decision. Here’s what ChatGPT and I had to say about this question.

ChatGPT’s Answer

“To determine if you can afford to purchase a house, you need to consider several factors, including your income, savings, expenses, and the housing market in your area. While I can’t provide specific financial advice, I can give you some general guidance on what to consider:

1. Evaluate your financial situation: Start by assessing your income and expenses. Calculate your monthly income after taxes and deduct your regular expenses like bills, groceries, transportation costs, and any existing debts.
2. Down payment: Determine how much you have saved for a down payment. Typically, it is recommended to have at least 20% of the house’s purchase price as a down payment to avoid private mortgage insurance (PMI). However, some loans may allow for a lower down payment.
3. Affordability calculation: The general rule of thumb is that your housing expenses, including mortgage principal and interest, property taxes, insurance, and any applicable homeowners association fees, should not exceed 28-30% of your gross monthly income.
4. Mortgage pre-approval: Consult with a mortgage lender or use online calculators to get pre-approved for a mortgage. This will give you a better understanding of the loan amount you qualify for based on your income, credit score, and other factors.
5. Additional costs: Remember to factor in other costs associated with homeownership, such as closing costs, home inspection fees, moving expenses, and ongoing maintenance and repairs.
6. Future considerations: Consider your long-term financial goals, job stability, and potential changes in income. Owning a house involves long-term financial commitments, so it’s essential to evaluate whether you can comfortably afford the mortgage payments over time.

Remember, these are general guidelines, and it’s advisable to consult with a financial advisor or a mortgage professional who can provide personalized advice based on your specific circumstances and local market conditions.”

My Take

In this answer, ChatGPT specifically says, “While I can’t provide specific financial advice, I can give you some general guidance on what to consider.” Essentially, this recognizes the key flaw in relying on AI (and the internet in general) for financial advice. It’s impossible for ChatGPT to take all of the unique factors of your situation into account when asking for basic financial advice.

It’s clear that ChatGPT can provide you with some food for thought. For example, prospective homebuyers should be looking at their overall financial situation, saving for a down payment, and running the numbers on their housing costs. But this basic information is only enough to get you started on a home-buying journey.

Also, ChatGPT mentions that most buyers will need a 20% down payment. But according to a recent report by the National Association of Realtors, the average down payment for first-time homebuyers in 2021 was only 7%.

Should You Trust AI Financial Advice?

AI financial advice isn’t always completely accurate. When you ask questions about personal finance, you’ll find general answers with lots of information to digest. Instead of getting a definitive answer, you might walk away with information that will help you make a decision.

If you have a handle on basic personal finance concepts, the general statements made by AI might not help you resolve your question. But if you are new to the world of personal finance, it’s difficult to know whether or not the information you are receiving is completely accurate or relevant to your situation.

With these flaws, AI financial advice should be taken with a grain of salt. While most of the information presented is true, the lack of personalization means the answer you receive might not be relevant to you.

The reality is that AI technology is evolving every day. As AI technology improves, financial advice from this tech might be more trustworthy in the future.

Frequently Asked Questions

Will AI Take Over Financial Advising?

It’s impossible to predict the future. AI financial advice may provide a baseline of knowledge to consumers. But as of now, it seems unlikely that AI could replace the human touch of financial advising.

Is It Safe to Take Financial Advice From AI?

As of writing, financial advice given by AI should be taken with a grain of salt. While basic information might be true, it’s difficult for AI to offer personalized advice for your unique situation.

The Bottom Line

Managing your personal finances efficiently can transform your life. As AI technology develops, it’s tempting to use this tool for financial advice. While you can find helpful information about money through ChatGPT, it’s not personalized advice that might help you move forward. Before taking any financial advice from ChatGPT, do your own research on the question to find the best answer for your situation.