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What is Personal Financial Management (PFM)? What it Means and Why It Matters

February 23, 2024|0 min read
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The biggest source of stress for a majority of consumers is money. Earning, spending, saving, or even just thinking about money can cause anxiety. In fact, MX’s latest survey of 1,000 U.S. adults found 52% of respondents say thinking about money makes them anxious and 53% say it’s a source of stress for them. 

52% of U.S. consumers say thinking about money makes them anxious and 53% say it’s a source of stress.

(Source: MX Research Report — How to Keep Consumers from Breaking Up with Banks)

This is why personal financial management (PFM) tools are so important for both consumers and the financial institutions, fintech apps, and other financial providers they choose to use. However, in today’s fragmented financial ecosystem and mobile-first environment, many PFM tools are evolving, consolidating, or disappearing. So what is personal financial management today and how does it work?  

In this post, we will cover:

What is Personal Financial Management (PFM)? 

Personal financial management, or PFM, refers to the ways that consumers monitor and manage their personal finances. With the rise of digital and mobile banking technologies, PFM now broadly refers to a type of digital banking solution that helps consumers manage their finances online or through a mobile app. 

At its most basic, a PFM solution allows consumers to categorize transactions, view accounts from multiple financial providers in a single place (through account aggregation), understand their spending, calculate their net worth, and create or manage budgets. 

PFM vs. Budgeting 

PFM tools and software are more than a simple budgeting tool that helps consumers plan and keep track of money in and money out. They can offer a variety of insights, features, and tools that help consumers understand, manage, track, and make better decisions about their finances. This includes:

Account Aggregation

Consumers can create a single view of their finances by connecting external financial accounts. 

Automated Spending Categorization

A spending tool can help consumers quickly see where they’re spending their money without the need to manually sort or categorize transactions. 

Spending Comparisons

PFM tools can offer month-to-month comparisons so that consumers can see how spending habits change over time, as well as provide general comparisons to show them how they are tracking compared to their peers. 

Budget Creation

Consumers can set their own budgets or have one created automatically for them based on their spending trends, with recommendations on the best options based on how they currently spend their dollars. 

Proactive Notifications, Reminders, and Alerts

Consumers can set up reminders and alerts based on different situations, such as upcoming bill payment deadlines, low balance alerts, large purchases, charges at particular stores or locations, etc. This helps them stay on top of their finances without the need to continually log in to the PFM tool or app.

Goal Setting

Goal setting tools can help consumers plan, prioritize, and visualize specific goals such as building up their emergency savings, planning for a large purchase, saving towards retirement, or pay off credit cards or loans. 

Personalized Insights

Automated insights based on spending behaviors can help give consumers better information about their money habits so they can make smarter decisions and plan ways to meet their financial goals.

Debt Reduction Tools

These tools help consumers understand debt, prioritize which to pay first, estimate their earliest debt-free date, and track progress towards reaching their debt reduction goals. 

Automatic Savings or Investments

Some PFM tools can also help people automate saving money by letting them create specific goals, “round up” purchases and put small amounts into savings automatically, etc.

Why is PFM Important for Banks and Consumers?

Personal finance management (PFM) tools have become increasingly important — and complex — as consumers juggle managing money across multiple financial accounts in a way that fits their lifestyle. 

Gone are the days of a consumer with a single bank account. Now, the average consumer has at least 5 to 7 accounts with various financial providers, with many who have upwards of 20+ accounts including everything from checking and savings accounts to credit cards, brokerage, loans, retirement accounts, and more at different financial institutions and fintechs. 

This makes embedded PFM tools the new “must-have” features for banks, credit unions, and other financial providers who want to drive engagement, loyalty, and retention of their customers. With so many different accounts available at the click of a button, consumers are quick to leave if they can’t get the tools and insights they need with a particular financial provider. 

How PFM Drives Engagement and Loyalty — and Increases Deposits

Consumers are looking for financial providers that can help them better manage their money and make smarter financial decisions. Half of consumers agree they believe financial providers have a responsibility to teach them to be financially strong. And, 59% of respondents want their financial provider to proactively help them better manage their finances. The financial institutions and fintechs who can deliver on this expectation will be the ones to reap the benefits — stronger engagement, lasting loyalty, and higher deposits. 

In fact, our research and analysis shows that consumers who engage regularly and often with mobile and digital banking services are more loyal, have less turnover, and maintain higher deposit balances than less engaged consumers. And, the more they engage, the greater the positive impact on deposits. Looking at the data for more than 10 million consumers across 12 months, consumers who regularly engaged with MX’s PFM features within their mobile banking experiences had the highest deposit levels and grew those balances during the year, even as deposit balances fell for those who didn’t engage as often.

More specifically, financial institutions and fintechs who leverage MX PFM and Insights see:

  • Higher consumer engagement: 50% increase in logins
  • Increased account aggregation: 20% of consumers aggregate external accounts
  • Stronger financial outcomes: 14% increase in savings balances
  • Higher account deposits: 15% higher deposit balances 
  • Lower customer churn: 9% churn rate, vs. the industry average of 10-15% 

How PFM Empowers Consumers 

Let’s face it — managing money is messy and the majority of consumers don’t want to spend their time managing a budget. Only a small portion of consumers actually like taking a hands-on approach to managing their finances. In fact, some people’s preferred method of facing debt is to ignore it. Psychologists call this “financial avoidance” and has led to an increase in average credit card debt year-over-year among Millennials and Gen Z. 

Embedded PFM tools make it easier for consumers to take control of their finances and build financial strength — without the spreadsheets or stress. The key word here is embedded. PFM tools need to be a part of the consumer’s experience within a digital or mobile banking app, not a separate thing. Here’s a few key recommendations on how to create the right PFM experience for consumers: 

  • Bring clarity to transaction data. Indecipherable transaction data can lead to frustration, confusion, and even false reports of fraud, as well as an increase in customer support volume. Transaction data should be cleansed and classified into simple, understandable descriptions, making it easy for consumers to identify, organize, and act on their financial data.
  • Make it connected. With so many different accounts with different financial providers, having the option to easily see all of their finances in one place can be a game changer. 
  • Streamline the process. Institutions with the highest adoption rates place the most sought-after information and common actions in multiple prominent locations within the digital user experience. By placing insights and opportunities in the flow-of-life tasks or habits that consumers have already adopted, financial providers can drive higher engagement.
  • Build new habits. By delivering insights in a predictable and repeatable manner — and if the content is obviously and reliably valuable and actionable — PFM solutions can create lasting engagement and healthier financial habits.

How MX Supports PFM Tools

With MX Personal Financial Management and Financial Insights, financial institutions and fintechs can provide financial management and planning tools that are embedded into their digital and mobile experiences. MX enables you to: 

  • Deliver personalized insights and recommendations to help consumers better manage spending, create budgets, increase savings, and pay down debt.
  • Protect, guide, and inform consumers with AI-driven, predictive insights that make it easy for them to take action to reach their financial goals
  • Enable consumers to connect external accounts in a few simple steps and gain a more complete picture of their finances
  • Help consumers easily organize, track, and interact with their finances with automated spending categories and enhanced transaction data.
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