Fixing Personal Finance Software

May 12, 2008

How much do you spend each month?
How much do you earn each month?

I’m not talking about your business, I’m talking about your personal finances.

On the surface these are simple questions.

But, I’d bet that you don’t know exactly. Why is that?

Most people can tell you more-or-less how much money they have (or don’t have!) in their main bank account. But, as soon as you throw in a credit card and perhaps a separate savings account or some investments, getting a summary and tracking movements across all of your accounts is not straight forward.

And, while every salary earner can tell you how much they make per year gross, it’s not so clear cut once you deduct PAYE, student loan repayments, KiwiSaver contributions, etc, and then perhaps throw in some interest from a savings account to top it up. If you’re paid weekly or fortnightly it can be difficult.

What’s more, in my experience, it’s surprisingly difficult to answer these two questions accurately without investing serious amounts of time in managing your finances.

It’s not that people don’t care, or prefer not to know.

Consider this quote from a former developer on the Microsoft Money team (the bits in bold are as in his original post):

The majority of consumers who buy computers claim that personal finance management is one of the top three reasons they are purchasing a PC. They’ve been claiming this for more than a decade. But only somewhere around 2% of consumers end up using a personal finance manager, with Intuit Quicken and Microsoft Money dominating the market. Both products have been around for — you guessed it — more than a decade. This dramatic disconnect between consumer demand and actual market penetration is mind-boggling.

Take a guess at what percentage of consumers launch Money ever again, after running it only once. You’ll need to remove a digit from whatever percentage you’re currently guessing. It’s seriously that low. Granted, most copies of Money are actually pre-installed by the OEM on consumer machines, so you’re not exactly dealing with a captive audience. But we’re still looking at a huge discrepancy between expressed consumer desire and actual consumer behavior.


So, based on this evidence, you’d have to say that the tools are broken.

How do we fix this?

How can software help rather than hurt?

What makes it so hard at the moment?

The popular applications (Microsoft Money, Quicken, etc) are all simplified versions of business accounting packages, so they start with an assumption that you will categorise every transaction. This is where the problems begin…

Firstly, you need to come up with a set of categories that suit your spending habits. On the surface this is easy, but the devil is in the detail. For example, do you have one category for “Food” or do you split it out into “Groceries”, “Restaurants”, “Take Aways”, etc. You are forced to choose between a few high-level categories, which make it easier to categorise but don’t provide so much detail, or a nightmare of categories and sub-categories and sub-sub-categories.

Secondly, you need to get your transactions from your bank into your system. Overseas the tools integrate with the banks to automate this process, but here you need to manually log into your bank, export a file and then import into your application from there. This is a huge barrier to updating your accounts on a regular basis.

Then, assuming you can get all of that right, you still need to invest the time it takes to categorise each and every transaction each month. This is where it can quickly start to get ridiculous. If you tend to use EFT-POS a lot like I do then you’ll have hundreds of transactions to categorise each month. And if you don’t, you’ll need to remember how you spent your cash. For example, if you take $100 out from the ATM and spend it on various things over the course of a week, how do you deal with that? Or, if you buy a chocolate bar from the petrol station does that get split out or grouped in with “Petrol” or “Car” or “Transport” (or whatever category you’ve decided on to track that particular expense).

Some of the newer online tools have tried to use the advantages of the web to address some of these problems.

Wesabe allows you to tag transactions – so each transactions can be logged in multiple categories. They also recommend tags based on their community of users. Mint takes this a step further and tried to automatically code your transactions for you. The downside is that you have less control over the categories used, and have to live with some inaccuracy (they wouldn’t be able to deal with the chocolate bar and petrol example above, for example).

Wesabe has a browser plug-in which partly automates the transaction import for you. Mint fully automates this process by asking for the login details to your online banking site. As far as I can tell anybody who does this will breach the terms of use of their online banking site, and leave themselves exposed from a security perspective, so I wouldn’t recommend it.

There must be a better way!

So, let’s step back and question the assumption that underpins most, if not all, of these problems:

Do you actually need to categorise every transaction?

I don’t think so *.

Go back to the questions that I asked at the top of this post.

To answer those you simply need to be able to add up all of the money paid into your accounts (your income) and all of the money paid out of your accounts (your spending). Any transfers between your accounts can be ignored

Imagine a system which would do that automatically for you – no work required, just login and see the totals, updated each day.

And, if you could create a system that people would actually use then there are lots of potentially interesting things you could start to layer on top of that.

You could show trends to show how spending is increasing or decreasing. You could allow people to create “goals” – a savings target, or a specific debt to repay – and display a barometer to track their progress. Or, you could recommend related products or services that are likely to be of interest to that user, based on their earning and spending habits. These are the things that people actually have in mind when they say that they want to use their computer to manage their finances. But they are just three simple examples. I’m sure you can think of others.

Who could do this?

The banks should be able to do this sort of thing really easily, because they already have the transaction data. But, I’m not holding my breath.

Most online banking systems feel more like a thin layer of lipstick on a crappy underlying banking system rather than a web application designed with any consideration for what the users wants to do. And, while it may be a little unkind, I just don’t back a large bank to be able to execute on this sort of application.

And any bank that tried to do this would need to work out how to source transaction data from other banks so that all accounts can be included (this actually isn’t as unlikely as it sounds – when I was in the UK I used for my online banking, and they were able to display transactions from my HSBC accounts via their clever Money Manager system).

So I reckon this is an opportunity waiting for somebody to grab it.

Perhaps I should suggest this to the team at Xero?

Additional reading:

It’s mostly unrelated to the topic of this post, but the MSDN blog I linked to above is actually quite entertaining. He seems to write one excellent blog post each year. I like his style! 🙂