How to Use AI to Improve Your Finances and Reach FI Faster

0:00Mindy Jensen:Can AI help you reach five faster? Today, we are talking about how best to use AI to help you stress test your financial independence plan, whether you're just starting out or you're nearing the finish line.

0:17Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my AI agnostic co-host, Scott Trench. Thanks, Mindy. I'm always just excited to work on my core model. But yes, I'm excited to talk about this. We just talked with Professor Aswath Demadaran from New York University about AI and the mega cap complex. And, you know, I think that there's a little bit of the question mark out there about how AI is going to generate returns for investors. but I think there's no question that AI is an extremely powerful tool that you can use in your personal finances today.

0:53Even if you only use one tip from today's episode, I think it'll be very powerful for you, even if you're not using it at all. And hopefully some of the ideas will give you, you know, just a little perspective about how I'm using AI and how Mindy's using AI and how we think it can be applied to your situation. We'd also, this is a new field. We'd love your feedback if you have tips or prompts or ideas is that you are bringing to the table and using with AI to evaluate your personal finances. So send those to scott at biggerpocketsmoney.com or mindy at biggerpocketsmoney.com if you have them. And with that, let's get into it.

1:25Mindy Jensen:All right, Scott, what are some of the guiding principles that you use to help you formulate your questions for your AI? I think AI benefits most when you can bring it a framework. If you let it invent the framework, that's where you can get yourself into trouble. And you can get yourself into trouble when you depend on it. When it's telling you to do something you don't understand, that's when you're about to really burn yourself. But when you use AI to take the complex, messy situation of your life and summarize it, simplify it, or make it actionable, that's when the power begins to emerge from AI.

2:00Well, the first principle I think of using AI is to start with tangible questions and get as much clarity as you can bring to your financial position, especially in the context of your specific situation, exactly where you're at today and where you want to go, what your goals in the future. If you can articulate those crisply, you're going to help the AI just as you would help yourself, your spouse, or a financial planner in a professional setting, if you could bring that information to them.

2:26Mindy Jensen:One of the big tips that I have learned when using AI and using writing prompts is more is better. So yes, you want to be as succinct as possible, but give this thing a ton of information, especially when you're first starting out. This is me. This is what I want. Like, have a conversation with it. Don't just type in five words. Do this. No, this is all of my background. Pretend like you're having a conversation with an actual person instead of asking a software to do something for you. I think framing it with information is very helpful as well because it will invent stuff sometimes if you don't give it detail.

3:04And it will still mess up even if you do provide a detail. But just like humans do, by the way, in some situations. As part of that, some of the stuff we're building over at biggerpocketsmoney.com slash resources, for example, could be helpful. We've got a personal financial statement over there. That could be a great thing to download, put in some of your information or redact it or change it if you're concerned about privacy, but put in the information into the personal financial statement and upload it to the AI. The AI will then have context on your situation and be able to answer certain questions.

3:31You can reference that document. Another good one is framing how you want to handle certain situations. So for example, I, with my insurance, as someone who's financially independent and has a significant net worth, I like to pay the lowest premium possible and I'm willing to pay a higher deductible in order to get a lower premium. That means I'd want a bronze Affordable Care Act plan, for example, for my family. A car insurance policy, for example, that had a lower premium and higher deductible. Or maybe I would self-insure my car as I bought the insurance to insure other drivers in the road.

4:03So that framework matters because the AI is going to default to something different if it doesn't understand your preference and how you want to handle some of those. And then the core challenges that you want to address, right? The core challenge at first could be where the heck is all our money going? I don't even know. Help me diagnose and just build an accurate representation of my finances. Another core challenge could be, I feel like I'm underpaid at work. How do I progress my career going forward? Another one could be I'm overpaying for insurance and I want to shop and change my insurance philosophy because I can afford a higher deductible and I have a large cash position.

4:34You know, can one parent afford to quit or just work less? That's a common one we get. But giving those challenges and saying, what are the top concerns in my situation will help the AI ground its discussion and interpretation of these things against that core challenge.

4:49Mindy Jensen:These are all great tips, Scott. And again, I can't stress enough, give this thing a ton of information, especially when you're first starting out. They learn about you as you go. So down the line, you might not need to give them so much information. But if this is your first interaction with AI, act like you're meeting a new person. This is all about me. Act like you're meeting a new CFP. And then the information that you get from AI, you are definitely going to want to double check. The next principle that I like to put into play when using AI is I like to give it a definition of strategy. I'm a big stickler for this and I annoy people with this, but strategy I think is key is so many things in business and life.

5:31And it's a diagnosis that accurately represents your situation. It's a set of guiding principles that actually focus on your challenge. And then it's a specific set of actions that you could begin implementing reasonably quickly or immediately that actually follow from the diagnosis instead of guiding principles. For example, if one parent wants to quit or work less, then the entire strategy, the financial plan that we're building here, should be a reasonable interpretation of our existing position, what the cash flows look like or withdrawal capabilities of our portfolio look like, what the difference in the remaining spouse who continues to work's income and your expense profile is going to look like, and whether we can reasonably cut back or stop working entirely.

6:18We want everything grounded in that. And we want to understand the trade-offs, the lost wealth that we will not be building towards age 65 around. That's what strategy or financial planning is. It's a set of trade-offs. And I think that that's where the AI can be a superpower. You force it to apply strategy. And if you don't, you can risk getting a garbage checklist of best practices that broadly apply to American finance, but don't apply maybe to your situation.

6:44Mindy Jensen:Yeah, I think it's really helpful to be able to ask specific to you questions. This is my specific situation. This is how much I make. This is how much my partner makes. We want to have a baby and I want to stay home or I already have a baby and I want to go down to part time. These are our expenses. This is all of our information that will maybe be pertinent to this decision. Help us walk through this. And you can anchor the strategy component with that by giving it a prompt like using Professor Richard Rumelt, author of Good Strategy, Bad Strategies, Definition of Strategy in Diagnosis, Guiding Principles, and Specific Action.

7:20Help me understand, you know, what my core challenge is here and how I can go about addressing it most effectively. That kind of thinking will help the AI focus on your challenge, for example. The next principle I have is think in iterations. AI's superpower is its ability to generate a draft almost instantly, right? I mean, And you can literally type in a prompt, you will get a draft if you ask for it moments later or minutes later, depending on how big of a prompt you get, maybe a few hours at most if you're doing something really complex and using one of the frontier models in there. But that's its superpower.

7:50Abuse that. It should help you generate a bad rough draft almost instantly and iterate sequentially to a fantastic rough draft over the course of a day or even a week or two. And that is really the superpower of this. And if you think like that, hey, this is my latest iteration. This is a draft here. That's going to help you not overcommit yourself or make a huge mistake that you can't recover from in this process because AI can make mistakes. But if you put it together in draft format, I think you're going to get to a really strong starting position where the huge irreversible decisions are now concrete enough and packaged well enough to get really good advice from a professional on.

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9:39Mindy Jensen:Ask it to pick this draft apart. That's a great way to find good overall but not good for you suggestions in this, what you thought was a fantastic rough draft. Or maybe the second AI or the third AI doesn't find any issues with it. That's when you know that you've got a really solid plan to start looking at more deeply. Yep, absolutely. And by the way, incognito mode is a great friend for a lot of these, right? So you can say, hey, go into chat GPT and do a temporary or incognito chat and ask it to produce a rubric. Say, what is a world-class financial plan look like for a married couple in their 30s with two young children earning about this amount of income with about this amount of expenses and this type of portfolio in its existing sense.

10:25The goal is to retire early, but still have plenty of margin of safety to make it to 65. It wouldn't be the worst thing in the world. We don't hate it. We know at our jobs right now, it wouldn't be the worst thing in the world to work an extra year or two if that greatly increased our safety margin and gave us longer term terminal wealth. Give it a prompt like that and ask it, what does a world-class financial plan look like or rubric for a financial plan artifact, you know, for this couple. And then once it's produced that, then submit your latest draft or iteration against that and ask it for grading against that rubric.

10:58It's not perfect. You'll still encounter problems, but I think you'll be able to see the power of that speed of that iteration and exposing weaknesses in your plans or unaddressed areas or challenges very quickly. And that's going to greatly improves the quality of the artifact that you, the draft that you're producing.

11:14Mindy Jensen:Yeah. Keep in mind that it is just a draft. I think the fourth guiding principle should be don't take it for granted. It's still a work in progress. AI can absolutely make mistakes and it will occasionally confuse popular opinion for accurate factual information in the context of analysis. So I think, yeah, that's the last principle, right? Is don't take it for granted. It will confuse this stuff all the time. For example, I think that in the world of financial independence, a good option for life insurance is to build a term life ladder, right? So if I need two and a half million dollars to hit my financial independence number and I had zero net worth, I would want a two and a half million dollar term life policy to protect my family in that situation.

11:56I'm overly simplifying here, but that's an idea. But let's say a couple of years go by and I have a million dollars in net worth and my financial independence number is still two and a half million dollars. Well, then I'd want a$1.5 million policy to bridge me from my$1 million dollar net worth to my$2.5 million financial independence number, right? So a term life ladder, if someone was starting from zero and working towards a$2.5 million target, might look like having a$500 ,000 policy that will expire after 10 years, a$1 million policy that will expire after 20 years, and a second$1 million term policy that will expire after 30 years.

12:30That way, as they reach, presumably grow wealth across that time period, those policies roll off and the insured amount is the remaining bridge to my financial independence number, right? You can see how that would save you a lot of money because you're not paying for 30 years for a policy you don't need the entire way. And you're still, you know, assuming you have your framework correct and you understand how much your family needs, making sure that your family is protected in the event of your passing. That's to me what a good policy looks like. However, most of the rest of the world talks about a multiple of income, you know, 10 times your income or 20 times your income, and that's the amount you should insure for.

13:01So if you don't give the AI frameworks like that, Then the AI may default you to something that is not best for your family or your situation in a lot of these situations. So that's the more you know, the more powerful the AI is in some ways in a lot of these areas. Because otherwise it may produce a recommendation. You don't understand what's really behind it, why it's doing that, because it's just giving you consensus or most popular viewpoint, not what's actually making the most sense in your situation. Strategy.

13:27Mindy Jensen:Yep. That's a great tip, Scott. Let's talk about some specific tips. What do you got, Mindy? What's the first one here? Use the AI to help you develop your personal financial statement or a summary of your position. Now, you can take the one that we have at biggerpocketsmoney.com slash PFS, which stands for personal financial statement, fill it out and upload that to the AI and ask it to analyze where you're at along with where your goals are and give you kind of a plan for how to get to that place. If you are using a tool like Monarch, you can download your transaction activity and upload that to your AI, or you can use the native AI on Monarch.

14:07Mindy Jensen:Upload your credit card statements, your bank statements, and ask AI to analyze what's going on in your situation compared to where your goals are. By the way, you can redact all of this information if you so choose to. You can pull out certain things. You can choose exactly how much or whether to share anything with the AI. However, this, I think, episode does presume that you're generally comfortable with sharing the information with the AI. If you're not, don't. And go talk to a financial planner or use some other process here. I'm a big believer that this is going to amplify our financial journeys.

14:38And if the AI becomes as good as we think it will be, it'll be able to hack our information anyways within a few years. So might as well make the best use of it. It could be a risk that other people find totally unacceptable. I find the benefits to be very, very powerful from using AI and being fairly open with it with my finances. But that's a personal choice that many other people will make differently across time. But you can redact this and should abuse incognito mode with the AIs, where it supposedly does not store your information. And yet, like Mindy said, the personal financial statements, the resources we're building at biggerpocketsmoney.com slash resources are built with AI in mind and using AI in many cases, because I think that that's what makes it powerful.

15:16Download that personal financial statement, fill out that information. Now the AI is receiving your information in a framework that makes sense to it and the approach to financial independence. then ask it to modify and personalize it, right? If you're not a real estate investor, the real estate schedule and the personal financial statement is useless. If you are a real estate investor and you have 40 properties, it only has the default template for five or six of them. And you're probably gonna wanna really turbocharge your enlarger, zoom in on that to some degree. That's what AI is so powerful as.

15:43When you have an idea of the problems you wanna face, asking it to summarize or magnify or zoom in on or focus on the challenge areas becomes a really powerful tool that helps you make decisions and frame problems. Yep. Okay, what's the second tip, Mindy?

15:57Mindy Jensen:Use AI to draft a draft financial plan. So this is not your final financial plan, but you want them to give you, I keep saying them like it's a person, treat it like a person. Ask questions like, what does a world-class financial plan look like for someone like me? Again, you've given it all your information or most of your information. You've given it your specific scenario. What does a great financial plan look like for me? Oh, maybe this is something that I love. Maybe it's not. Then you start iterating on what it is you've asked it to do. Ask a question like, what would an elite CFP's approach to developing a financial plan look like for someone like me and execute that?

16:40Mindy Jensen:And you don't have to ask it just one question. Ask it a bunch of stuff. Ask it to throw a ton of things at you. And then you kind of comb through that. It's, ooh, I like this. I like this. I like this. I can see how this would be valuable too. and then craft your own plan from all the different things that you've asked. The next tip here is to iterate, iterate, iterate, right? So once you've drafted something that's useful, something that's directionally helpful to you, what I'll literally do sometimes is I'll open up four incognito tabs or temporary chats with Grok, Gemini, Claude, you know, the latest model, and then GPT's latest model.

17:15And I will put into each of them, give me a rubric for a world-class financial plan look for someone like me, just like Mindy said in the last step, you need to draft the plan. Then I'll submit the plan that I have to all four of them at once. And over the course of the next 10, 15 minutes, I get a grade back and suggestions or feedback from it. And that gives me an enormous amount of input on there. I can read through that and say, I like this. I don't like this. This AI is being overly in the weeds here. And that allows me to iterate. I can take the parts I like from those reviews and feed it back into my core chat with the AI and say, what do you think of this?

17:50Let's talk about this. I like this one. I want you to update this. That iteration process is extremely powerful. You can go through that over the course of a day or two and get a ton of iterations out to get to a really, really strong place. But one tip though, is to make sure this doesn't go to infinity. The AI will go on forever finding ways to expand or make your plan more comprehensive until you get to, you know, 50 pages of AI slop. So make sure that as you get past those first few iterations where you genuinely want like an open-ended model, make sure you force the reviewer, the AI to distinguish between factual errors, major omissions, things that weren't included, preference it has, or you have on an unknowable or unanswerable challenge, right?

18:31It's a preference to do life insurance the way I discussed, not a absolute law. So it may or may not be a factual error to get a term life ladder versus a larger term policy for the full 30 year period, you know, make sure it distinguishes between those and what optional additions it might suggest are. Once you get to a point where it stops beating up on those, or you can't find too many iterations or evolutions that aren't preference or decisions you've already made or whatever, then you know, you're getting to a pretty good rough draft.

19:01Mindy Jensen:A pretty good rough draft. I like that. Scott, what's your next tip? My next tip is to use the AI as a neutral observer. So when I'm using AI, for example, with OpenAI in particular, which is, I used to use Clawed up until a couple of weeks ago or a week or two ago when the new GPT model came out. I tell the GPT model, I don't want it to be sycophantic. I don't like it when it tells me that I'm great and my plan's awesome and what a good grade you got here and all that. I want it to actually produce real feedback that I can begin to iterate on. So I set the AI to efficient mode. I don't want it to be verbose.

19:32I want it to be direct. I don't want it to be critical or harsh. That creates a problem in itself, but I want it to be accurate, as accurate as it possibly can. So I go into the settings and change some of those. And then I ask it to provide an opinion before, like, you know, abuse incognito mode. So I say, a household like mine should spend what on groceries or what on electricity or what on these items here? And then it provides that answer. And then I submit my data to it so I can compare it without it anchoring to me to tell me something I want to hear, right? Because that's one of the problems of these AI models, that they want you to keep using it.

20:06But if you can get it to anchor and provide an answer first and then compare yourself to that answer, that will give you a lot more power in these processes and will expose a lot more of your weaknesses. What's the next tip, Mindy?

20:17Mindy Jensen:Ask specific to you questions. You can use AI to help you create a budget, especially if you're in the beginning stages. Upload your bank and credit card statements and ask them for spending habits and potential spending leaks. Ask it for help determining your asset allocation. Again, these are my goals. This is where I'm starting. Where should I be putting my money based on what I want to do? What accounts should I be putting my money based on what I want to do? My 401k, my Roth IRA, et cetera. And you can use it to ask specific to you questions when you're faced with unusual scenarios. Let's take our couple who decided that, in fact, their partner could decide to quit their job, but that partner was the one providing health insurance.

21:03Mindy Jensen:They usually have the option of COBRA, which is continuing the health insurance you had before, but you're probably paying the entire premium versus going out on the exchange. You can ask AI to run through all the scenarios, run through the costs, and give you a good idea of what would be the best choice for you. It always sounds like, oh, just go on the exchange. It's going to be so much cheaper. I actually had a friend. They had had a baby that year. They had almost reached their entire out-of-pocket max spending. And it was July. So they weren't sure if they should go on the exchange or go on COBRA.