By Charles Thomas, CFP®, MBA, and ChatGPT

Artificial intelligence (AI) is significantly reshaping how individuals approach financial planning. From investment strategies to budgeting and saving, AI’s influence is widespread. The technology can potentially improve financial decision-making, reduce risk, and increase efficiency. As we increasingly incorporate AI into our financial lives, it is important to understand how it can affect your decisions and shape your approach to wealth management. What’s more, you’ll want to address the potential downsides of using artificial intelligence in your financial planning.

Budgeting and Expense Tracking

AI tools have revolutionized the way people track their income and expenses. Personal finance applications, such as eMoney and Monarch, employ AI to track users’ spending patterns, categorize purchases, and set realistic budget goals.

These apps can automatically identify unnecessary or excessive spending habits and offer suggestions to help you cut back. For instance, AI can analyze monthly expenditure on dining out or subscriptions, flagging areas where you can save money. 

Retirement Planning

Retirement planning is one of the most important aspects of personal finance, and AI is transforming how people plan for this crucial life stage. AI-powered platforms can analyze current income, savings rates, expected inflation, and market conditions to accurately calculate retirement needs. They can even simulate different scenarios, helping you adjust for unexpected life events, economic changes, or market downturns. 

In addition, AI can track contributions to retirement accounts and offer suggestions on increasing savings to meet long-term goals. For example, if your retirement savings fall behind target, AI could suggest boosting monthly contributions or shifting to more aggressive investment strategies.

Ensuring that people are adequately prepared for their later years is more critical as life expectancy increases. AI can provide the necessary tools to help people save more effectively and smartly. 

Financial Fraud Prevention

AI plays a crucial role in protecting against financial fraud by using advanced algorithms and real-time data analysis to detect suspicious activities. It uses anomaly detection to flag unusual transactions, machine learning to predict and adapt to emerging fraud patterns, and biometric and behavioral analytics for secure user authentication.

AI also supports transaction risk scoring, fraud detection in account creation, and scam prevention through natural language processing. Additionally, AI enables real-time monitoring, data encryption, and collaboration across financial institutions to improve fraud prevention.

Overall, AI can enhance security, making financial transactions safer and reducing the risk of fraud. 

AI Downsides in a Financial Plan

While AI offers numerous advantages in managing financial plans, there are some notable downsides. One major concern is the potential for overreliance on automated systems. As AI algorithms are based on historical data, they may not always account for sudden market changes or unpredictable events, leading to potentially poor investment advice or financial decisions during times of economic uncertainty.

Furthermore, AI systems are only as good as the data they are trained on. Biased or missing information can lead to skewed results. For example, you might end up with bad investment advice or mistakes in budget forecasts.

Human Emotion: One significant downside of AI in financial planning is its inability to account for human emotions and psychological factors, which play a crucial role in personal financial decisions.

Financial planning isn’t just about numbers; it often involves emotional considerations like fear, stress, and personal values. AI lacks the emotional intelligence to understand why someone might make an impulsive purchase, delay saving for retirement due to anxiety, or take on high-risk investments because of excitement or overconfidence. 

These emotional factors can lead to decisions that deviate from optimal financial strategies. While AI can offer rational, data-driven recommendations, it may not be able to guide you through the emotional side of financial choices, such as navigating financial stress during a market downturn or coping with the uncertainty of future goals.

Additionally, AI lacks empathy, which is often needed when facing tough financial situations or make life-changing decisions like buying a home or planning for retirement. Without the nuanced understanding of human emotions, AI’s advice can feel impersonal, potentially leading users to ignore or distrust it when emotional factors are at play. 

Life Adjustments: AI could be beneficial when you sit down and ask it a question, but what if life gets busy and you forget to ask? A potential downside to AI in financial planning is that it doesn’t proactively tell you when to update your plan.

While AI can analyze economic data and generate recommendations based on past trends, it lacks the human intuition to recognize life changes that require financial adjustments, such as a new job, marriage, major purchase, or unexpected expenses.

Without regular manual oversight, an AI-driven plan could become outdated, leading to missed opportunities or financial risks. Unlike a human advisor who checks in and adapts to personal circumstances, AI typically requires the user to initiate updates, which can result in gaps in financial preparedness. 

Financial Law Changes: A key limitation of relying on AI for financial planning is that an individual may not be aware enough of new tax laws or policy changes to ask AI about them. AI typically responds based on user inquiries, meaning if someone doesn’t know a law has changed, they won’t think to update their financial strategy accordingly.

Unlike a professional financial advisor who stays informed about legislative updates and proactively advises clients, AI won’t automatically notify users of relevant tax law changes unless specifically programmed to do so. This gap could lead to missed tax-saving opportunities or unintended non-compliance, potentially resulting in financial penalties. 

Conclusion

While AI can help with certain aspects of a financial plan, such as creating and tracking a budget, making retirement planning projections, and preventing fraud, it lacks some of the most important qualities of a good financial plan—such as human emotion, the ability to adjust for life events, and the capacity to implement new tax laws. A good financial plan can incorporate the best of both worlds. 

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.