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I asked ChatGPT for financial advice. Here's what happened.
These days, people turn to artificial intelligence (AI) chat tools like ChatGPT for help with everything from writing emails to designing recipes. But what about financial advice?
I asked ChatGPT three common personal finance questions to find out how accurate the responses would be. Here’s what happened.
Query No. 1: How do I make a budget?
Creating a budget involves tracking your income and expenses, then allocating your money to various categories to ensure you're living within your means and working toward financial goals. Start by calculating your monthly income from all sources, then list your expenses, dividing them into fixed (e.g., rent, insurance) and variable (e.g., groceries, entertainment) categories. You can use a budgeting app or manually track spending to get an accurate picture of where your money goes.
Once you know your expenses, you can apply a budgeting method like the 50/30/20 rule, where you allocate 50% of your income to needs (essential expenses), 30% to wants (non-essentials), and 20% to savings or debt repayment. It's important to adjust these percentages based on your financial priorities and goals, such as building an emergency fund, saving for retirement, or paying off debt.
A successful budget requires regular review and adjustments. Revisit it monthly, especially if your income or expenses change, and track your progress toward financial goals. With consistency, a budget can help you take control of your finances, reduce unnecessary spending, and save for future needs.
Our take
Overall, ChatGPT’s budgeting advice was sound, albeit very basic.
The 50/30/20 rule is a simple but popular budgeting method that helps you break up your monthly spending into needs, wants, and savings. ChatGPT offered a helpful overview of how this method works and how to get started. And importantly, it encouraged me to revisit my budget periodically to make adjustments and track my progress.
That said, the 50/30/20 rule is just one of many budgeting methods, and it isn’t for everyone. Other effective budgeting strategies include “pay yourself first,” zero-based budgeting, and the envelope method.
A financial pro may be able to recommend a strategy that is better suited to your needs and spending habits, as well as provide more detailed guidance about how to split up your expenses and stay on track.
Read more: Struggle with budgeting? Following the 50/30/20 rule could be your solution.
Query No. 2: How do I save for a down payment on a home?
Saving for a down payment on a home requires setting a clear savings goal and developing a disciplined plan. Start by determining how much you need, typically between 3% and 20% of the home’s purchase price, depending on the type of mortgage you’re seeking. Once you know the target amount, break it down into a manageable monthly savings goal. Automating your savings by setting up regular transfers to a dedicated account can help you stay on track and make the process more consistent.
To maximize your savings, choose the right account. A high-yield savings account is a good option for short to medium-term savings, while investing might be considered if your timeframe is longer. In addition to saving, consider reducing discretionary spending, refinancing high-interest debt, or finding ways to increase your income through side jobs. You might also explore down payment assistance programs or family gifts to help reduce the amount you need to save on your own.
Regularly track your progress and adjust your plan as needed. Staying flexible and adjusting for any changes in your financial situation will help you stay motivated and on track to achieve your goal. With persistence and a clear plan, you’ll be well on your way to saving for a home down payment.
Our take
Buying a home is often the biggest purchase a person will ever make, and saving for a down payment can be a hurdle in that process. Again, ChatGPT’s advice for how to save for a down payment generally makes sense — figure out how much you need, then break it up into manageable monthly installments. It even recommended putting those funds in a high-yield savings account and exploring down payment assistance programs.
Of course, the advice is fairly surface-level. You may not be sure how to choose the right savings account, adjust your budget to make room for this goal, or go about finding specialized homebuyer programs.
A financial advisor or similar professional may be able to take it a step further and help you develop a plan based on your unique financial situation. However, following ChatGPT’s advice can give you an idea of where to start.
Read more: Saving to buy a house? Here's where you should park your down payment money.
Query No. 3: How do I pay off credit card debt?
To pay off credit card debt effectively, start by assessing your balances, interest rates, and minimum payments. Create a budget to understand your income and expenses, then identify areas where you can cut back to free up extra money for debt repayment. The next step is to choose a repayment strategy that works for you. The debt snowball method focuses on paying off the smallest balance first, while the debt avalanche method targets the card with the highest interest rate. Both methods have their advantages, with the avalanche method saving more money on interest, while the snowball method can be motivating with quick wins.
You can also consider transferring high-interest debt to a credit card with a 0% introductory APR or taking out a debt consolidation loan to simplify payments and lower interest costs. It’s crucial to avoid adding to your debt, so stop using credit cards until the balances are paid down. Make extra payments whenever possible, using windfalls like tax refunds or bonuses to accelerate progress.
If you’re struggling, seek professional help such as credit counseling or, in extreme cases, debt settlement or bankruptcy. Track your progress and celebrate milestones to stay motivated. By consistently following a plan, making more than the minimum payments, and avoiding new debt, you can regain control of your finances and eventually become debt-free.
Our take
ChatGPT offers basic (but sound) advice for paying down credit debt. That includes getting organized and listing out your debts, then prioritizing how you’ll pay it down. At the end of its response, ChatGPT also recommends seeking the help of a credit counselor if needed to help craft a customized debt repayment plan.
Ultimately, this is a good starting point, but with so many options, it may be difficult to know what direction to take. You may need to ask more specific follow-up questions to pinpoint the right approach.
For example, depending on the amount of debt you have and your credit score, qualifying for a 0% APR balance transfer card may be difficult. Meanwhile, options like bankruptcy and debt settlement may help you wipe out your debt faster, but these strategies have negative and long-lasting consequences for your credit and finances.
Read more: The best ways to pay off credit card debt
Can ChatGPT replace my financial advisor?
ChatGPT can certainly help point you in the right direction and answer general personal finance questions to some degree. However, when it comes to the most recent financial information and news, ChatGPT’s scope is limited.
For example, when I asked the question, “What is the national average savings account rate?” ChatGPT generated a response that referred to 2023 data, which is now outdated. If I were to rely on rates from last year when evaluating the best account offerings today, I’d be making an uninformed decision.
Of course, not everyone needs a financial advisor to help find basic financial information. But if your situation is complex and you’re trying to make important decisions regarding your money, it can be dangerous to rely on AI alone for answers. Not only can the responses be outdated — if not flat-out incorrect — but AI chat tools also lack the nuanced understanding of different individuals’ specific circumstances. A human financial advisor has the training and expertise to understand your unique financial situation, goals, risk tolerance, and more.
In other words, ChatGPT can be helpful in some situations, but it could be unwise to make it your first and only stop for financial advice.
Read more: How to use AI to improve your finances
