Learn how technology can help you build a hassle-free budget, so you can avoid debt and achieve your goals.
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What is PFM?
PFM stands for Personal Financial Management. It’s basically a very fancy acronym for technology-based budgeting. A PFM allows you to pull financial data from all your accounts into a single budgeting platform. It automatically categorizes transactions and learns categories you assign, so it gets smarter the more you use it. You can also set spending targets with alerts, which help you stay on budget so you can avoid debt.
How is personal financial management different from basic budgeting?
The main difference comes from technology. Traditional pen and paper or spreadsheet budgeting requires a lot of work. You must manually enter transactions to track spending over time. You must also manually categorize transactions to match your budget. Traditional budgeting is highly labor-intensive, which is why so few people do it.
By contrast, a PFM does all the heavy lifting for you. It’s smart enough to automatically assign categories based on the transaction. You can also manually assign new categories and the PFM learns what you want. This way, tracking spending becomes automatic. You can set spending category targets to avoid overspending day to day. The PFM alerts you – usually by tech, email or app notification – if you get too close to a target.
Most PFMs allow you to link all your financial accounts into the system. You link up your checking and savings accounts, credit cards, utilities and other bills, as well as any assets you have, like retirement accounts. It pulls the information into the PFM from all these sources. That means you only need to look in one place to get a full view of your financial landscape.
Where can I find a PFM that’s right for me?
Start with your financial institution. These days, most banks and credit unions offer a PFM as part of their online banking services. It may already be integrated with your checking account. Then you just link up your other accounts and make sure categories are set the way you want. Having a PFM integrated with online banking minimizes the security risk of using a PFM because it’s already integrated with an existing online account that you maintain.
Check out free third-party apps. If your bank or credit union doesn’t offer a PFM, then you can look for a free third-party tool. Either hit up the app store on your smartphone or do an online search for “personal financial management” or “free budgeting tool.” You can find programs like LearnVest that can help you track daily expenses and manage your money.
Find: Personal Finance Apps to Make Managing Money a Breeze
Need a budget? Then you need a PFM.
Are you a consumer who needs to know what money you have coming in and how you’re spending that money each month?
Unless you really just don’t care about being financially successful, the answer to that question is yes. And that means you need a budget – which with today’s technology and financial diversity, means you usually need a PFM.
Fact: About one out of every three consumers use a PFM of some kind.
A personal financial management (PFM) platform is really just a super-fancy (and cool acronym) way of saying “budget.” You bring all of your account information into one place so you can see what you have coming in and going out. You can manage your money all at once to get the total picture you need. And you eliminate the hassle of pen-and-paper or spreadsheet budgeting (which is the financial equivalent of still owning cassette tapes and CDs).
So who doesn’t need a PFM?
Given the answer above, it really may seem like absolutely every consumer in the U.S. needs a PFM to be successful. But that’s not necessarily true. If your finance is entirely linear and straightforward, then it may not be necessary.
Let’s say you have one checking account and a savings account with the same bank, you avoid credit cards completely, and any loans you have are through the same bank, too. With this in mind, your bank’s basic online system may be enough to mange your money effectively. There’s no reason to bring everything together in one convenient place, because it’s already there.
On the other hand, if you have credit cards with different issuers, checking and savings with one bank but an MMA account with another, loans from several different lenders and a few modest investments, then you have more need. Essentially, the more diversity you have to your financial outlook, the more need you have for a PFM because it gets harder and harder to keep everything organized since it’s all in different places.
How to use a PFM
Step 1: Find a PFM that fits your money management style and needs
PFMs differ in several ways. Some focus on saving and helping you invest. Others simply allow you to budget and track daily spending. Others have features such as bill share, which help you share expenses if you have roommates. Manual entry for cash transactions can also be useful, particularly if you have a job where clients may pay in cash, such as pet or house sitting.
So, do some research and find the tool that works best for you.
Step 2: Link up your accounts
All PFMs require you to link your accounts so the program can track your spending. It’s recommended to link as many of your accounts as you can into the PFM. That way, you get a complete financial picture in one place.
If you use a third-party tool, the main account you need to link is your checking account. That’s where the bulk of your transactions happen day to day. Be sure to choose a PFM that offers bank-level security protections if you don’t go through your bank.
Most PFMs can even link to accounts that require multi-factor authentication. Those are accounts that require you to answer security questions to log in. Simply give the PFM the security question answers and it can access multi-factor accounts.
Step 3: Review auto-categorized transactions
When you first link up your accounts, the PFM will attempt to categorize them. These programs are smart enough to recognize when you buy gas at a gas station or get food at a grocery store or dining out.
Of course, it may not recognize all your transactions. You may also want to manually set up categories. For example, let’s say you want to separate groceries from dining out. Simply categorize the transactions as you want and the system will learn for future transactions.
Step 4: Set spending targets and goals
Once you categorize everything the way you want it, you can set monthly spending targets. Basically, you set a goal for spending in a particular category. The goal is always to stay below that target. Then you set up alerts, either by text or email or app notifications to tell you when you’re approaching a limit. This will help you rein in overspending so you can stay on track.
Many PFMs also allow you to set goals. So, you tell it that you want to save a certain amount of money per week or month. Then the program can help you stay on track.
Step 5: Use added features to save and avoid overspending
Most PFMs also have added features that help you avoid overspending or that help you save. These include:
- Cash back offers
- Coupons and deals
- Budgeting reward programs
Explore these features and use them to your best advantage. The more features you take advantage of, the easier it will be to stay on budget.
PFM FAQ
In most cases, these programs offer bank-level security because they deal with sensitive financial transactions. These are some of the security features you should look for when selecting a PFM:
All information should be sent over a 256-bit SSL encryption
The PFM should have an IDS (a network-based intrusion detection system)
It should include trust logos, such as TrustEE and McAfee
It should always operate on a secure connection (https)
The PFM should purge data daily (i.e. it doesn’t save your information in the platform); instead, it syncs every time you log in
That being said, there is always some additional risk when you open an additional financial program online. That’s why we recommend starting with your bank or credit union. If you can get a PFM through an online account you already have, you don’t increase your risk of identity theft.
Yes. Budgeting is essential to maintain long-term financial stability. But most people don’t budget because it’s such a hassle. PFMs remove that hassle, so you can obsess about your money without a lot of work. Instead, all you need to do is log in or check your app every day to know where you stand.
Not necessarily. It’s about finding a PFM with features that fit your needs and goals. For the most part, you can find free tools that can do that securely. You should only use a paid PFM if there is a specific feature that it offers that you can’t get anywhere else.
It’s also worth noting that there’s very little difference between a PFM vs budgeting software. PFMs grew out of budgeting software, like QuickBooks and Quicken. And these days, budgeting software also offers online account integration and syncing. That means the lines between the two options are slim to nonexistent.
In general, no. A PFM never allows you to make transactions within the system. Even if the PFM includes a bill pay calendar, you must set up recurring payment dates through the service provider. The PFM just pulls the data from the account to tell you when you need to pay. In some cases, it may pull bill due dates and say you can click a button to make a payment. However, this will simply take you into that account.
Yes. In order for a PFM to work, it must be able to sync with an online account. If there’s no online account to sync with, there’s nowhere for the PFM to pull transactions from so it can work. If you’re wary of online banking because of the security risk, go for budgeting software that doesn’t sync online. Then set your security settings so the system is completely closed and only available on your desktop.
Always make sure to close the account. This doesn’t mean just deleting the app off of your smartphone. You need to go into the system and manually close your account. This will ensure that your sensitive financial data and login credentials don’t linger in case the PFM provider gets hacked.
