How to Consult ChatGPT on Personal Finance & Where It Falls Short

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Since its launch in Nov 2022, ChatGPT has become a valuable AI tool with many uses,  such as summarizing huge chunks of texts, answering questions, writing code and songwriting, email marketing and content creation, to name just a few. 

But how useful is ChatGPT in the realm of personal finance and in helping people make good financial decisions?

Let us start by looking at some of the most common applications of ChatGPT in personal finance:

Financial literacy

ChatGPT can explain personal finance concepts and the basics of investing, budgeting or financial literacy in a condensed and easy-to-understand manner. For example,  ChatGPT can explain the basics of tax-advantaged options such as 401Ks, backdoor Roth, HSAs and 529 plans. It can explain how a particular company stock performed over a 10 year period. 

Financial planning and recommendations

If you provide information about your finances, ChatGPT can help you analyze your situation and help with planning and recommendations. It can provide budgeting, retirement, debt management or tax planning advice. It can analyze household budgets and make suggestions for improvements. 

Investing

ChatGPT can help you understand investment principles and concepts such as asset allocation, diversification, and risk tolerance. It can also make suggestions on asset allocations based on your age and risk tolerance. It can explain the stock performance of publicly traded stocks. 

Let us focus on financial planning and look at some live examples of ChatGPT addressing some common financial planning questions.

Example 1: Retirement Planning

We are trying to figure out the earliest age that a person can retire, given inputs such as income, retirement contributions, expenses & current net worth.  

Prompt

“I have a gross income of $200,000 in California. I max out 401K and invest my post-tax savings per month in stocks. My monthly expenses are $10,700. I have a net worth of $50,000 and am 30 years old. How soon can I retire? I want to maintain 80% of pre-retirement expenses levels in retirement.”

I tried this prompt 2 different times and got different results. In version 1, ChatGPT said I could retire at age 48. In the second version, it said I could retire at 63, even though the prompt was exactly the same. That’s a pretty wide range, so which one is true?

It turns out that in Version 1, ChatGPT does not deduct my taxes from gross income, so it overstates my annual savings as $49,100. In version 2, it deducts a tax rate of 30% and computes my savings to be $18,350. This version 2 provides a more realistic retirement age, since it takes taxes into account.

What ChatGPT does well

• It provides a step-by-step breakdown of its logic and calculations. So you can follow along and understand how it is arriving at the answer.

Where ChatGPT falls short

• You cannot always guarantee that it is doing the correct steps, for example, it missed taxes and overstates the savings, leading to very different conclusions.
• It does not seem to take inflation into account, and this is a very big factor in financial planning. 
• You can get different results when you run the same question multiple times. So how do you know which of these is right?

How Planwell can help

• Planwell calculates the earliest retirement age to be 68 after considering inflation of 2% and wage growth of 2% as well. 

• Planwell has its own financial model with taxes and all expense types built in. Therefore, for a given set of inputs, you will get the same results when you run the model multiple times. The model is tested rigorously against many different use cases and outlier situations, so we know that it works for all types of scenarios.

• Planwell is visual – you can look at your results and easily understand how your net worth changes over time. ChatGPT is text-based, so it is hard to work with and understand data via text interface.   

Example 2: Should I pay off debt or invest?

Prompt

“I have $10,000. Should I pay off my student loan at 4% annual interest or invest in stocks?  

What ChatGPT does well

• It provides a detailed overview of all the factors that will help you make an informed decision.
• If you provide more detailed inputs about your financial situation, it will even crunch the numbers for you.

Where ChatGPT falls short

• Initial answers are generic and you need to provide a lot of inputs to get the right answer.
• The answer is verbose and hard to understand because it is text-based. You have to dig through a bunch of text to get the exact answer.

How Planwell can help

• Planwell provides an easy way to visualize the results and make an informed decision right away. You can even input variables such as mutual fund fees to see how returns on investments change with higher vs lower fees.

• Planwell takes more variables into consideration. For example, the impact of student loans changes with the date of the loan, the date on which you plan to put in cash to pay it down and how much of the loan is remaining. It is hard to model all this with Chatgpt but Planwell does this easily. In short, when there are a lot of input variables, it is easier to model and visualize it with Planwell, compared to ChatGPT.

Example 3: Home Affordability

Let us say we want ChatGPT to tell us a home affordability number. Ideally, this should be tailored to one’s lifestyle and expenses.

Prompt

“How much house can I afford with a $100,000 salary? loans are $400. Additionally my monthly expenses are 60% of take home pay. I also put 10% of gross income towards 401k.” 

What ChatGPT does well

• It provides a step-by-step answer and gives you a home value based on standard debt/ income ratios of 28% or 36%.
• It considers mortgage rates while coming up with a home affordability value. 

Where ChatGPT falls short

• While it does compute how much money is available after expenses and retirement contributions, it does not actually use this for computing the home affordability number. Therefore the home affordability is based only on rules-of-thumb and not on one’s own personal situation.

How Planwell can help

• Planwell calculates home affordability based on not only standard ratios and rules of thumb but also gives you a fully personalized option,based on your own personal situation and expenses. It can help you trade off home affordability against other goals you may have and make a decision that is right for you. 

Example 4: Explanation of Financial Concepts (Bogleheads Investing Approach)

We ask ChatGPT to explain a financial concept such as the Bogleheads investing approach. 

Prompt

“Bogleheads Investing Approach”

What ChatGPT does well

• ChatGPT does a good job of providing a concise summary and describes many of the main ideas of the Bogleheads investing approach. 

Where ChatGPT falls short

• The explanation is pretty generic. It does not go into details of who this approach is a good fit for, and who it is not good for. 

How Planwell can help

• Planwell’s blog posts try to showcase the real-world impact of the personal finance concepts such as the importance of low fees. For example, we show the difference that low fees of 0.10% can make to an investment of $10,000, compared to actively managed funds with high fees of 2%. This helps the reader see the Bogleheads investing ideas in action.

The above examples show that while ChatGPT is very useful in answering personal finance questions, it nevertheless has several disadvantages. 

Downsides of ChatGPT

Accuracy

It is hard to say if the recommendations and results provided by ChatGPT are entirely accurate. You may have to cross-check the numbers provided by ChatGPT to make sure there are no errors.     

Limited data visualization

ChatGPT uses a conversation style for accepting inputs and generating responses. There is limited data visualization. However, personal finance scenarios are often best understood with data visualizations and charts. Moreover, the most relevant information, such as the amount needed for retirement or age of retirement is hidden in a wall of text and is hard to understand right away.

Long-term planning

The interactions with ChatGPT are a series of disjointed conversations, and not conducive to longer term planning, budgeting & tracking of finances.   

Planwell as an AI Financial Advisor and Planning App 

We are building Planwell, a fully automated AI financial advisor and planner to help people make financial decisions that are super personalized to their goals and financial situation. Planwell uses its own financial models to ensure accuracy under many different scenarios. The data visualizations are intuitive and easy to understand and take action.

Planwell helps you figure out your earliest retirement age, the amount needed for retirement, home affordability, and many more financial decisions, both major and minor. We also help you run what-if scenarios and make tradeoffs between different goals and financial choices.

We will be launching the product very soon. Stay tuned for an update. In the meantime, check out our blog posts to help you plan your finances.

• How to Use AI Budget Calculators and Tools to Plan Your Finances: Take advantage of our free FIRE calculator  to plan your finances more effectively.
• Backdoor Roth IRA Process: Learn more about the backdoor Roth IRA process. 
• 5 Overlooked Workplace Benefits: Lesser known workplace benefits that can be super useful and help save a lot of money. 
• How to build a personal financial plan: Build your personalized financial plan with our 10 step guide. 
• How to Use AI Budget Calculators and Tools to Plan Your Finances: Take advantage of our free FIRE calculator  to plan your finances more effectively.
• 5 Common Money Mistakes to Avoid: Learn about the pitfalls that could derail your early retirement plans.