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Sick of spreadsheets? Here’s everything you need to know about personal financial management (PFM)

Bankrate logo Bankrate 10/26/2020 David McMillin
a woman wearing a hat: A woman looks at her phone. © @criene/Twenty20 A woman looks at her phone.

When you think about your money, your brain may be pulled in a number of different directions: the cash coming into your checking account, the expenses you pay each month, the charges on your credit card and the funds you're investing to grow for retirement. Instead of juggling all those amounts in separate places, personal financial management - commonly referred to with its acronym of PFM - uses technology to make sense of those dollars and cents.

How is PFM different from budgeting?

So is personal financial management just a fancy way of saying "budgeting"? Not exactly. Following a budget is indeed part of personal financial management, but PFM has evolved into something much bigger, says Nate Gardner, chief customer officer at MX, a company that builds products for banks and credit unions such as U.S. Bank, Barclays and BBVA.

"The term personal financial management was born out of the old process of keeping track of where your money was going," Gardner says. "Some people had the discipline to say, 'I'm going to stay in this range of spend.' Those were the roots of the old idea of an envelope-based approach to budgeting."

Now, rather than restricting the concept to the PFM acronym, Gardner likes to look at the field with a bigger definition: "How can we augment information and deliver greater clarity that empowers humans to be more financially strong?"

Your bank might already offer a personal financial management tool

A lot of banks have been working to answer that question. Over the past few years, the most-recognized names in banking such as Citi, Chase and Bank of America have integrated new features within their mobile apps and unveiled new services designed to help people set saving goals, monitor spending and make more informed decisions about their money. While the biggest banks have made headlines for enhancements to their PFM tools, Gardner says that smaller banks are part of the shift, too.

"Customers aren't spending any time in branches anymore, so financial institutions are making sure that they are making the digital experience better," Gardner says. "The companies that provide technology to the community banks are doing it, too."

Looking beyond banks

Depending on your personal finances, though, a tool offered by your bank may not be able to give you a comprehensive view of your finances. For example, you might have a checking account and a credit card with one bank, but what if your savings account is at another institution? What about your investments or your 401(k)? What if you're paying back student loans through another provider?

Your bank may let you link in these outside accounts, but there are also fintech companies that work to streamline all that information and help you save money. Some, like Mint, offer a free introductory level, and others such as Digit, Stash and Qapital charge monthly fees that vary based on the features you want to access.

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How to use personal financial management

With all the PFM options out there, how can you choose the right one? Gardner says you'll want to find a tool that can bring all of those inputs and outputs into one centralized place for a "360 view" of your finances.

"Find a solution that will allow you to pull in all your accounts," Gardner says. "If you can get all of your transaction data in one place and the tool will do some of the categorizing work for you, you can then confirm if the data is accurate."

In addition to adding up all the data, consider these tips to effectively use PFM.

Pick a tool that simplifies your life: The entire foundation of PFM is to eliminate spreadsheets and extra work. "If you're still having to do an enormous amount of work to get the data correct, the value of the tool is diminished significantly," Gardner says. "If the data is unstructured and unclean, you're no better off than before you started using it."

The information should be actionable: "A strong solution should be guiding and nudging you toward smarter spending habits," Gardner says. "The app should start to alert you if you have multiple subscriptions or if you're going to exceed your credit limit. Perhaps it can help make you aware of how you compare against a broader population. Those features can be incredibly helpful."

Make sure the tool is about your financial journey - not selling you more financial products: Gardner points out that some personal financial management tools were designed with a business model that didn't prioritize the customer's best interests. Instead, an advertising-based model can put credit card offers in front of the consumer with tempting sign-up bonus offers and rewards points opportunities. While those can work for some savvy consumers, they can also be debt traps.

Customize the categories - and don't have too many of them: Tara Unverzagt, CFP, founder of California-based South Bay Financial Partners, says the key to using any type of PFM is "to not overcomplicate the setup."

"Have about a dozen categories, no more." Unverzagt says. "It should be super simple for you to update. If you have too many categories, you start using cognitive brainpower to put your expenses in the 'right' category. Then, it’s hard and you won’t do it. Keep it really simple, and easy to log each day."

What if you decide to stop using the PFM?

These tools are designed to help you as you continue to grow, but there is a chance you could eventually break up with your current PFM. Think of it just like you might consider your Netflix account. If after watching content for years, you decide to cancel your subscription, what happens to your viewing history? However, there is a key difference with your PFM: Your spending and saving data is much more important than which comedies you binged in the fall of 2020.

Some already are already taking steps to let you keep your information. For example, a Digit spokesperson says that if a customer decides to cancel his or her $5 monthly subscription, the company allows the ability to download monthly statements for up to 30 days after closing the account.

Having those statements can be helpful, but Gardner says that the financial industry has a long way to go to make breaking up with a PFM painless.

"I think you'll see more financial institutions invest in allowing the portability of data," Gardner says.

For now, moving all your spending and saving data from one PFM to the next may not be that easy, so Gardner recommends making sure a tool is worth your long-term commitment.

"The mobile experience of using a financial tool should feel equivalent to what Tesla is in the auto industry," Gardner says. "Instead of just driving you from point A to point B, it should also watch out for your safety and give you warnings about where to turn and how to avoid accidents."

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