An abundance of apps and tools offer short-term personal finance solutions like categorisation of expenses, monthly budgets or tools for spending less. Yet, many of the financial challenges that consumers face concern life events that are relevant on a longer term - applying for a mortgage, proper allocation of savings or building up a pension. The intangible nature of these financial considerations make it challenging to develop relevant PFM solutions that resonate with consumers’ challenges.
The first step towards developing meaningful long term solutions is therefore concretising how people deal with long term personal finance and identifying their current behaviour. Bittiq headed out to speak about this topic with 50 consumers to discuss their long term financial challenges. This article shares what we uncovered about consumers’ sentiments towards long term finance and puts forward the implications for relevant personal finance solutions.

 

Financial health, not financial planning

As one of the first questions, we asked our interviewees whether they could elaborate on how they currently plan their long term finances. We quickly noticed that the question resonated very poorly and many respondents indicated they did not require any financial planning, arguing ‘I easily come by each month’ or ‘I don’t need to plan for specific goals - I just buy something’. Yet, when we continued to inquire what steps they did undertake, almost everyone acknowledged to monitor their long term finances closely, both retro- and prospectively. Annually making financial overviews for multiple years ahead was more a rule than an exception. 

So how is this different than financial planning? The important nuance became clear that consumers merely wanted to have a constant feeling that they were in control over their finances - a sense of financial health. Financial planning for them implied a level of financial unhealthiness or the need for micro-managing their finances, and therefore addressed the wrong sentiment. Rather, people were looking for peace of mind about all financial aspects of their life.


“When it comes to long term finance, most people do not micromanage but just try to ensure financial health.”

 

Macro-management

Following up on this sentiment, we wanted to uncover the concrete actions people undertook to keep their feeling of financial health. Many interviewees reported using a manual spreadsheet - not meant for tracking each penny but containing approximations of the bigger money flows for all larger financial themes. This practice of roughly dividing long term finances into themes was heard so frequently, we dubbed them ‘building blocks’. Most commonly mentioned building blocks were: savings for kids, annual events like taxes/tax returns/subsidies, a general buffer for large expenses, costs related to their car and the monthly cost of living. On top of that, people tend to try and estimate the remainder of savings after money was allocated to all building blocks. This remainder would e.g. be allocated for investing, extra mortgage repayment or just stay put on their savings account.

We found that people aimed at monitoring several questions for each building block, with the following clear common aspects:
1) Is an adequate share of savings allocated?
2) Are any financial events upcoming and what does that mean for my situation?
3) Did any anomaly occur and what caused it?
Together, these aspects seemed to provide consumers with the peace of mind about their finances. The implication for a PFM solution that is relevant for consumers, is that a good solution at least answers to one of the three questions. This provides a handhold what type of automated solution could replace the current manual steps. Doing so provides a hook to make a long term finance tool more relevant for consumers.

Lack of data-driven insight

Notably, we found that their financial spreadsheets were not only manual but also in many cases based on subjective estimates. People allocated money to specific building blocks but had no insight into their annual spending and hence the actually required allocation. This amongst others applied to the buffer people reserved for large expenses, the amount reserved for car-related expenses and for the amount of savings reserved for kids’ education. This lack of insight into the required allocation creates a discrepancy between the saved money and the actually required savings. More importantly, it creates uncertainty about the free (un-allocated) amount of savings which could potentially be dedicated to goals like investing, paying off a mortgage or saving extra for a pension. Hence, PFM solutions that increase this insight can potentially simplify or automate long term financial decisions.

Conclusion

When it comes to long term finance, the general consumer sentiment is a perceived feeling of financial health. Although tools for financial planning address an existing challenge, it fails to appeal to the share of consumers that feel adequately in control of their financial situation. For this share, long term finance mainly entails retaining the sense of proper allocation of savings and being aware of anomalies. 

The control consumers try to attain over their finance is however only to a limited extent based on data-driven insight. Although many data-driven PFM solutions are flooding the market, they do not appeal to the right sentiment. Long term solutions offered by banking apps are generally limited to financial planning tools such as ‘savings goals’ or budgets. If PFM solutions want to be truly relevant for long term financial challenges, it should in foundation replace the manual and subjective work consumers currently require to feel financially healthy. If done in a way that resonates, this opens up the gateway to provide relevant service related to topics like mortgages, investing, savings and pension.

Understanding how people think about their long term finances opens up the gates for PFM solutions that go beyond short-term finances or micro-management. Since open banking is considered as an enabler for meaningful interaction, acknowledging these customer insights is thus essential for financial institutions that want to increase relevance for their customers.