By Andrew Shilling, MarketWatch featuring Shane Cummings, CFP®, AIF®, Wealth Advisor & Director of Technology/Cybersecurity
With many high-yield savings accounts now paying 4% or more, it’s a great time to be saving money. But it’s extra tough for many families to do right now.
Consumer prices are 4% higher than they were just 12 months ago, according to government data. So it’s no wonder that 61% of Americans said recent price increases caused them financial hardship, up six percentage points just since November, according to Gallup survey data released in May. What’s more, Fed Chair Jerome Powell recently said that interest rates might soon rise again.
All of this, no doubt, makes it hard for most of us to save, especially someone on a more limited income. (That’s especially rough now, as many savings accounts are paying 4% or more; see some of the highest-paying savings accounts here.)
So for some insight on how to put aside cash during these unique economic times, we asked Open AI’s most updated version of its artificial intelligence chatbot, ChatGPT-4, to discuss the best single strategy to help someone short on income to save. Then, we asked a financial adviser to critique its response.
Is there a single strategy that can help someone with a limited income save cash?
ChatGPT-4 response
It should be noted that much of this response from ChatGPT was nearly directly pulled from various stories on the topic from places like Bankrate, The Annuity Expert and Investopedia, to name a few.
“While there isn’t a single strategy that guarantees success for saving cash on a limited income, one effective approach is the ’50/30/20 rule.’ This rule provides a framework for allocating your income to different financial priorities:
- Essentials (50%): Allocate 50% of your income to cover essential expenses such as housing, utilities, transportation, groceries, and healthcare. These are the necessary costs to maintain a basic standard of living.
- Discretionary spending (30%): Use 30% of your income for discretionary spending, which includes non-essential expenses like dining out, entertainment, hobbies, and personal care. While it’s important to have some flexibility for enjoyment, be mindful of how this portion is spent.
- Savings (20%): Aim to save at least 20% of your income. This includes building an emergency fund, contributing to retirement accounts, or saving for future goals. If you’re unable to save 20% initially, start with a smaller percentage and gradually increase it as your financial situation improves.
By following the 50/30/20 rule, you prioritize saving even on a limited income. This approach encourages disciplined savings habits and helps ensure that you’re allocating a portion of your earnings toward your long-term financial well-being.
However, it’s important to note that the 50/30/20 rule is a guideline and may need to be adjusted based on your individual circumstances. Some people with very low incomes may need to allocate more than 50% to essential expenses, leaving less for discretionary spending and savings. The key is to find a balance that works for your specific situation and financial goals.
Additionally, while the 50/30/20 rule provides a general framework, it’s crucial to adapt it to your needs and make necessary adjustments as circumstances change. Regularly reassess your budget, track your expenses, and make conscious decisions about your spending to maximize your savings potential.”
Response from a human financial adviser
AI’s suggestion to follow the 50/30/20 framework is not a technically wrong approach, says Halbert Hargrove certified financial planner Shane Cummings. However, he explains that the program unsurprisingly misses one key humanizing element. “It should be adjusted based on your individual circumstances,” he says, adding that “that can cover a pretty wide range of possibilities. Someone should not slavishly follow these ratios alone.”
With government inflation figures finding the cost of shelter is now 8% higher than it was 12 months ago, “so many people may find themselves immediately over the 50% ‘essentials’ threshold right from the get-go,” Cummings adds. “Changing something like that is no easy task in the short-term, particularly on a limited income.”
Depending on an individual’s financial circumstances, he adds that folks “may not be able to find more affordable housing in their area or may be struggling to save enough for a down payment on a home purchase. Given the recent increase in interest rates and run up in real estate prices since COVID, this challenge is ongoing for many younger savers.”
