You may not remember, but 1760 was not a great time for England. The country was facing serious economic turbulence ranging from growing conflicts. The Seven Years’ War and those increasingly pesky American colonies caused quite a headache for the British in terms of stretching their financial resources. There was also rising inflation and debt, and a population tired of the royal family’s lavish and extravagant lifestyle in the face of their struggles.
King George III ascended to the throne during this time and recognized the troubles his nation faced and the growing disdain for the monarchy. Parliament knew something had to be done and King George III, who didn’t want to begin his reign on a negative note, agreed. So Parliament passed The Civil List Act of 1760 which became one of the first documented family budgets.
Under this deal, the royal family surrendered their revenues for the duration of his reign in exchange for an annual sum of £700,000 to cover their official and private expenditures. This is approximately £116.5M in today’s pounds - not exactly a beans and rice budget. Both the Parliament and royal family assumed this would bring financial stability, and eventually prosperity, back to the nation.
George III initially cut costs without much ado, focusing on the expenditures of the royal household. His family also adopted a more frugal lifestyle. The royals became conscious of their spending and their newfound austerity was evident in public appearances and events. It seemed they were moving in the right direction. Looks can be deceiving.
This frugality was not sustained or implemented with strict rigidity over a long-period of time. For example, in the same year the royal family budget was passed, George III commissioned The Gold Stage Coach. The gaudy and over-the-top carriage can be seen below. Nothing says “man of the people” like a gold stagecoach rolling through town.
He also purchased the quaint Buckingham Palace for his wife the following year and renovated it. George III also collected more than 65,000 books. Not exactly shining examples of modesty.
The constraints on the royal family did not last, nor did the government’s attempt to improve the nation’s debt issues through the implementation of a budget. Over time, the conflicts became costlier as the American colonies were ramping up their revolution.. The evolving geopolitical circumstances, in addition to the royal family’s constant grappling with their own opulence, made it quite challenging to maintain a strict budget as additional needs for monies kept pouring in. By the end of the 18th century, Britain faced an even greater national debt.
Even worse, after the death of George III in 1820, his son King George IV became known for his lavish and extravagant spending. George IV had even more opulent tastes than his predecessor, which was a constant source of contention between the royals and the citizens.
Thus the results of the royal family budget were not as positive as King George III nor Parliament had hoped. Ultimately, the financial issues of the country and the royal family persisted. So where did they go wrong? Should the royal family have also cut out lattes and avocado toast? The first formal budget of the royal family was unsuccessful and ineffective, even with the oversight of an entire government.
The inability for budgets to meet their goal over a long period of time is due to human psychology and rigidity. Humans are flawed decision makers. This is a theme we will continue to address throughout this paper.
Sure, there were short-term improvements, but Parliament and the royal family could not consistently make the lasting changes to their spending and adhere to the financial parameters. Over time - at the governmental, business, and individual levels - traditional budgeting does not achieve its goal to create lasting financial stability to enable wealth creation. Any sustained attempts to budget are futile and performative, with only minor short-term positive effects.
Traditional category-based budgeting methods are obsolete and should be replaced with a more effective strategy which integrates human psychology and the advances of modern technology. The story of King George III is relevant even today, but is still just one family, one government, and one story which took place a few hundred years ago. What about today?
In 2018 The Association of Consumer research conducted a study which demonstrated there is minimal evidence that sustained budgeting correlates with wealth building and reaching financial goals over a long period of time. Simply put - budgets don’t help you reach your financial goals and they don’t help you become wealthy.
Similarly, a Nerdwallet survey showed 84% of Americans say they budget, but nearly the same amount (83%) also say they regularly overspend. It’s safe to conclude if the same number of people who are budgeting are also overspending, budgeting as we know it simply does not work.
A new framework for effective long-term cash flow management is needed. There is an intention to control cash flow present as the overwhelming majority of people, according to the Nerdwallet survey, want to manage their money wisely. We believe through combining modern technological advances and the principles of human psychology there is a solution to the current ineffectiveness of budgets.
The royal family budget in 1760 was one of the first family budgets, but there is evidence budgeting concepts were implemented centuries prior. For example, King Hammurabi of Mesopotamia around the year 1700 BC wrote the earliest known legal codes, which became known as The Code of Hammurabi. His Code included instructions regarding taxation, trade, and social responsibilities, but also a structured financial system which sought to allocate resources effectively. This is the first known attempt at a governmental budget.
More than 3600 years laters, the US decided to follow suit with President William Howard Taft implementing America’s first official government budget. Prior to President Taft’s call for a unified and standardized budget, government expenditures were approved on a case-by-case basis by Congress. Agencies would submit requests for funding and Congress would then vote on each appropriation after some deliberation. There was no systematic, centralized planning for government spending.
President Taft’s administration posited that a centralized plan for government spending would help assess overall fiscal wellbeing. A federal budget should have made allocating taxpayer dollars to various agencies and projects much simpler to manage. Unfortunately, history tells us this has not been the case.
In total, the federal budget has run a deficit 75% of the time. But things are getting worse, in just the last 70 years, the US overspent its budget 87% of the time. The last time the US came in under budget was 2001. The efforts to stick to a budget continually fall short for a few reasons.
First, they are designed to reflect previous year spending, without much planning for future changes. They don’t anticipate the future - including wars, additional departmental requests, new initiatives, and a lack of oversight. A more recent example, after 9/11 Congress immediately allocated an emergency $40 billion in response to the attacks. This money wasn’t included in the original fiscal year budget.
Secondly, they are inflexible. Budgets are dependent upon past data and the spending parameters do not adjust based on new information. What happens when a family experiences a medical emergency or house repair but didn’t budget for it? The budget fails.
Lastly, humans are flawed and make poor choices as we’ll continue to discuss. A popular modern example is someone making impulse buys on sites like Amazon after a cocktail or two! (Note: The author does not admit nor deny partaking in this modern folly.)
Again, on the governmental level, traditional budgeting has proved a fruitless exercise. On the business level, shortly after the US implemented a federal budget, Donaldson Brown, the CFO of Dupont created the “Dupont Formula” in 1914. This is a budgeting method that standardized how large businesses measured profitability, return on equity, and efficiency. Companies around the world have since implemented Brown’s method for budgeting. Yet, while budgeting is an essential pillar of financial planning for organizations, it presents a dilemma known as the “budgeting paradox”. IBM says a budget should ideally provide the most accurate and timely idea of anticipated revenues and expenses. The budgeting process at the large business level can take months. By the time the budget is finalized and approved, it’s likely outdated. The paradox of traditional budgeting is the more time you spend creating it, the more it loses its relevance. The world continues to move and evolve as we create budgets, so IBM argues, “the very timeline devoted to creating an accurate budget might end up being its downfall.” Still, not spending any time on a budget would also be disastrous and the company would not have any clue as to its financial position even if the numbers are outdated.
Instead, IBM promotes flexibility in business budgeting, specifically incorporating AI-generated technology for speed, efficiency, rolling forecasts, and scenario planning. Much like the government example above, businesses also need flexibility in their budgets for new initiatives, unexpected project costs, and necessary pivots. IBM’s AI for business is able to “analyze large amounts of data to identify and extract insights or facts from documents or reports…” IBM also claims their AI can “discover patterns, trends or anomalies, traditional AI and ML algorithms can then forecast and make predictions…specific to the user’s needs and business requirements.” This is a far more advanced and forward looking method of budgeting that focuses on the likelihood of future events.
Budgets provide a rigid decision-making framework that allow us to decide where we want to put our money, but as the past has shown, problems arise when we must stick strictly to these plans. History makes clear our psychology gets in the way whether we are running a nation or a business, which begs the question: if entire countries and large corporations can’t stick to a budget, how can we expect individuals to do so on their own? Hint: We cannot.
The answer is inherently simple yet complex - budgets fail because of human nature.
First, the average person faces more than 35,000 conscious and unconscious decisions per day, leading many of us to “decision fatigue”. This decision fatigue directly impacts our ability to manage our own money and make prudent monetary choices. Decision fatigue makes it such that we avoid any decisions we find difficult or draining. Financial decisions often fall into this bucket, meaning we often make them through avoidance or procrastination rather than by careful consideration and analysis.
Secondly, budgeting is arduous, time consuming, and humans are naturally built to take the path of least resistance. A 2017 study showed humans are, in fact, hard-wired to avoid effortful decisions. When managing money, we have the choice to budget or not. Choosing to not budget is the path of the least resistance and we are far more likely to choose this route. Besides, budgeting often triggers a sense of financial-related pain, shame, and disappointment. Budgeting goes against our human nature.
Budgeting is psychologically similar to dieting. It is based on restricting and/or limiting behaviors. The catalyst for dieting, as well as budgeting, is a turning point in one’s life. The person recognizes a need for change and thus wants to cut out the problematic choices. This is, in theory, a good thing. We must cut out what isn’t serving us. Yet, this once again does not account for how humans actually behave. Much like dieting, focusing on restriction leads to cravings and binging. We do the same thing with our money. We keep ourselves from spending money which eventually leads to a binge period where we succumb to impulsivity. Then we’re faced with feelings of guilt and shame. After punishing ourselves for our inability to consistently make good choices, we start the cycle over. Just as we cut categories of food in dieting, we do the same with spending. Restriction is once again our norm until the cravings inevitably reappear. This is a vicious, toxic, and well-documented cycle in both the health and financial worlds.
We are fortunate to live in a period of near superintelligence and rapid technological advancements. Artificial intelligence has been around for years, but it wasn’t until recently we began seeing applications for it in our everyday decision making, particularly in personal finance.
If a budget’s main goal is to create greater financial stability to enable wealth building, then we must use the new tools at our disposal in order to do so. Already other segments of personal finance are incorporating these technologies as well as human psychology to build better money habits. The most obvious example of this combined success is in retail investing. We believe the same algorithmic principles applied to the more than $7 trillion retail investing industry can also work for more effective cash flow management.
American participation in the stock market reached an all-time high of 58 percent of households in 2022. Just three decades ago that number hovered around 30 percent. A major reason for the substantial increase is the ease and accessibility of the markets now compared to years past. The availability of platforms, applications, and automation makes opening an account uncomplicated. Furthermore, investing via passive index funds and ETFs have created incredible wealth building opportunities for even the most novice investors.
Index funds and ETFs operate using algorithmic trading. This concept combines computer programming and financial markets to execute trades at precise moments using specified and predetermined rules. Other benefits of algorithmic trading include: best execution (i.e. the ability to obtain the best prices within trades due to the algorithm's speed), instant and accurate trading, lower transaction costs, reduced human error, and backtesting (a way to use historical and real-time data to prove if a strategy is effective).
Investors are able to automate their account contributions and share purchasing once, and the system continues to work with minimal effort going forward. This removes so much of the hurdle of repeating good financial behaviors over time. Because of AI, it is far easier to onboard new investors, particularly those with no prior investing experience.
Artificial intelligence also removes most of the human decision making, fear, and other emotions that pose significant roadblocks to good financial health. AI is the teacher, planner, and personal Chief of Staff when it comes to establishing a personal finance infrastructure.
AI is also now helping the masses build wealth like never before by increasing access and affordability. A person can easily buy a share of VOO, for example, and build wealth consistently as the algorithms keep pace with the changes within the S&P 500. The automated system moves set amounts of money into the account on certain dates each month allowing the account to grow exponentially over time with the elimination of poor human judgment (i.e. self sabotage). Before this technology, completing these steps manually was a far more complicated and time consuming process.
For non-expert investors, passive index funds allow folks to diversify their portfolios without having much knowledge of the underlying investments. How and when the stocks and bonds within the funds are transacted is dependent upon automated algorithmic trading. Again, human emotion is removed from the markets, making algorithmic trading free from fear, greed, and irrationality.
Before algorithmic trading and other advances, investing had a much higher barrier to entry. The process to open an account was more cumbersome, slower, prone to human error, and every trade cost more since they required human labor. The manual placement of trades could be done via paper-based transactions, phone trading, even open outcry trading on a stock market floor. This required a vast understanding of the markets and tremendous confidence. There was also far less information and research readily available to retail investors. What information was available was disseminated slower than today’s instantaneous circulation of knowledge.
Governments around the world also use AI to manage finances. Using algorithmic trading, governments issue and manage bonds, execute monetary policy, trade currency, optimize investment decisions, and even collect taxes. Central banks, Treasuries, and sovereign wealth funds are all already using algorithmic decision making to better their financial position.
The next frontier for cash flow management at the government, business, and individual levels is automated algorithmic decision making. In this context, artificial intelligence will optimize a person or entity’s finances by constantly analyzing balances and transactions, providing real-time insights into spending and investments, and moving money in an automated and optimized manner. A few more potential use cases for how AI can work as a proactive financial partner include:
The human behind the automated algorithms is still the one ultimately deciding how to earn and spend their money, but the arduous and mistake-prone parts of wealth building and cash management are removed. This will limit, and hopefully prevent, self-sabotage, irrational decisions, and emotions from hurting one’s finances.
You must’ve thought by now, “Oh, but I have a financial planner for that!” Essentially, artificial intelligence can and should replace many of the functions of a financial advisor or planner. Artificial intelligence within platforms and applications will also be much more affordable. This will introduce millions more to the benefits of working with a financial expert for a fraction of the price. Most financial planners charge a percentage of assets under management and/or a fee normally ranging between $2,000-$7,500 per year. The subscription costs of AI-enhanced cash management tools will be a small fraction of traditional advisors.
This is the first time in history we can manage money in this way. AI allows us to be more future looking than ever before. We can anticipate with greater certainty using algorithms how money will be spent based on actual data analysis.
As we discussed earlier, humans are prone to natural flaws including decision fatigue, fads like dieting, and inherent resistance to obstacles. Automated algorithmic decision making reduces these flaws. By implementing an automated and artificially intelligent financial system in our own life, we bypass our weakest traits. The highest barrier to entry will be the initial setup of the automation.
According to fintech company Bill.com, at the business level: “finance automation helps modern accounting and finance teams improve cash flow control by increasing efficiency, minimizing errors, and providing more visibility into a company’s cash inflows and outflows.”
Furthermore, according to Forbes, “automating data capture is the first step to providing real-time access to accurate and up-to-date financials, empowering companies’ accountants to make informed choices without delay. The ability to assess their current financial status instantly is especially critical in fast-paced business environments, seizing time-sensitive opportunities or mitigating risks before they escalate.”
For the individual, automating your finances and integrating artificial intelligence into your money decisions will make achieving monetary goals easier by systematically creating positive long-term habits. Implementation of automated algorithmic decision making into your money management will assist in building wealth and avoid costly mistakes, scams, and fraud.
We believe with continuing technological advancements in automated algorithmic decision making, humans can minimize, and hopefully eliminate, the inherent issues we’ve had for centuries in managing our cash flow. Through this new artificial intelligence we remain in control of our money, but are empowered to effectively manage our finances and create wealth like never before. The opportunity here is immense. AI will help families build better financial foundations.
