We asked ChatGPT for personal finance advice. Here’s what human advisers say AI got right – and wrong

As more Canadians turn to artificial intelligence for financial advice, The Globe and Mail wanted to know: How reliable are the answers?

A 2024 report from the Bank of Montreal found that a third of Canadians are using AI tools to help manage their money, from setting household budgets to boosting their financial literacy.

We posed some common personal finance questions to ChatGPT, then asked human personal finance experts to weigh in.

(The Globe is not aware where ChatGPT sources information for its answers or whether organizations have been compensated for the information. The Globe is part of a group of Canadian news organizations that has filed a lawsuit against ChatGPT owner OpenAI over alleged copyright infringement.)

Anita Bruinsma, certified financial planner and owner of Clarity Personal Finance in Toronto: All of these comments are true, but home buying is such a big decision that you have to go into a lot of detail to make sure you can afford it. ChatGPT’s answer also misses a few important points.

1. Buying a home will probably reduce the amount you will be able to save for long-term goals such as children’s education and your retirement. This could leave you cash-poor and unable to access enough money to pay tuition or to fund your living expenses after you stop earning an income.
2. For most people, their home is their biggest asset and ties up their money. This means you are relying on the value of the house to rise over time. If you are renting and can invest in the stock market instead of putting money into your home, you can be pretty confident about what your returns will be over the long run.
3. ChatGPT mentions home maintenance, but there is no mention of the cost. Many new homeowners are side-swiped by extra costs such as fixing a fence or replacing appliances. If you don’t plan for these costs, your house may become unaffordable.

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Benjamin Felix, chief investment officer and portfolio manager at PWL Capital Inc. in Ottawa: ChatGPT’s answer generalizes a complex decision to the point that the advice is probably not useful. It is true that the decision is related to your financial situation, lifestyle and long-term plans, but financial stability, savings and staying in one place for five years are not sufficient criteria to buy a home.

The best financial argument for owning a home is that it hedges the cost of living in that specific home. This is valuable if you want to stay in one location for a long time. Five years is probably not long enough. High transaction costs make frequent moving extremely costly, and, in the short run, the asset price risk of owned homes overwhelms the long-term hedging benefits.

It is not necessarily true that renting is a more financially sound option than owning in expensive markets. For example, based on current numbers for average prices and rents in Toronto, buying is financially advantageous based on a reasonable set of assumptions. Importantly, the answer does not mention taxes. The tax-free growth of owned homes is particularly advantageous for those with high taxable income who have already maxed out their registered savings accounts (registered retirement savings plan, tax-free savings account, or first home savings account).

The verdict: ChatGPT got the basics right: It’s about your money situation and lifestyle. But that’s pretty general. The AI tool missed some big stuff such as how much repairs and upkeep really cost, how owning ties up your cash and that five years might not be long enough to make buying worth it.

Score: 6/10

Natasha Macmillan, senior business director of everyday banking at Ratehub in Ottawa: While the avalanche method is a smart, strategic approach to tackling credit card debt, completely avoiding new credit card purchases isn’t realistic for most people. Yes, you should cut non-essential spending, such as travel, dining out and online shopping. However, many people rely on their credit cards for regular, everyday expenses, making it nearly impossible to stop using them entirely.

Rather than struggling to avoid all new purchases, I’d recommend using a balance transfer credit card to consolidate your existing debt. These cards typically offer ultralow introductory interest rates, giving you room to regain control of your finances while still allowing you to use credit for necessary expenses.

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Felix: This answer offers two common debt repayment strategies, but does not give any context for their associated trade-offs. This is an important miss as the avalanche approach (paying off the highest interest debts first) is objectively optimal while the snowball method (paying off the smallest balances first) is financially suboptimal, but may have behavioural benefits.

Research has found that paying off small debts first, while more costly and slower overall, may increase the likelihood of getting out of debt due to the small victories the method creates. On the other hand, research that educated consumers on the amount of interest they were paying on their various loans refocused their attention on the highest interest debt, and helped them reduce overall debt more quickly. Educating consumers on the rational approach and the practical behavioural trade-offs of a financial decision would be more useful than offering the two options with no context.

Desmond Nwaerondu, a Calgary-based certified financial planner at Sun Life Financial Inc.: ChatGPT provides a great answer as a baseline. I would like to see more of an explanation as to why you would use the avalanche method versus the snowball method. As an adviser, I’d recommend using the avalanche method, a debt repayment strategy that involves paying off debts with the highest interest rates first, while making minimum payments on all other debts. I’d also help clients understand why this method makes the most sense mathematically to reduce debt faster while paying less interest, and I’d help them create a road map to put this strategy in action.

The verdict: ChatGPT explained the main methods well and said to pay more than the minimum. But it didn’t explain why one method might work better for some people or the trade-offs between the avalanche and snowball approaches.

Score: 7/10

Bruinsma: Yes, investing is the answer. But the rest of the investment answer is too simplistic and can lead people to take immediate action without making an investment plan or knowing what they are doing.

Adam Chapman, a certified financial planner based in London, Ont.: If you’re working, keeping your income at or ahead of inflation is the best way to protect yourself against rising costs. After that, the accounts you invest in are just as important as the investments in those accounts. ChatGPT’s response does not mention taxation on the income earned on the investments it recommends, which could ultimately reduce growth to below inflation.

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Felix: It is not necessarily wise to invest all cash in excess of an emergency fund in risky assets such as stocks, index funds or real estate. Budgeting for short-term purchases and other liquidity needs should also be included in that assessment. Real return bonds are a challenging example in this case because while they are indexed to inflation, they are also exposed to other risks such as duration risk. For example, XRB, the iShares Canadian Real Return Bond Index ETF, declined nearly 24 per cent between Dec. 31, 2021 and Oct. 4, 2023.

The verdict: ChatGPT said investing is key, which is true. But it made it sound a bit too easy and missed saying that some savings need to stay safe and liquid. Also, it didn’t mention taxes or explain that some investments aren’t perfect inflation shields.

Score: 6.5/10

Bruinsma: This is one way to start investing, but you can also use your bank branch and invest in mutual funds, which is probably way less intimidating for most people.

My concern is that there isn’t any advice about putting a plan in place before jumping in. This is what happened to a lot of people early in the COVID-19 pandemic: They opened an online brokerage account and started investing but had no plan, no idea what their allocations should be and just jumped in buying stuff. Some people lost money, got discouraged and dropped the idea of investing.

Felix: The immediate suggestion of an account type could lead someone in the wrong direction. What if they are disabled and a registered disability savings plan (RDSP) is a better choice? What if they don’t have any TFSA or RRSP contribution room? Contribution limits are not mentioned at all. What if they are a U.S. citizen, complicating the use of a TFSA? What about the FHSA? The remaining suggestions are reasonable, but the account type recommendation with no context could put an uninformed user in a bad position.

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Macmillan: I would also add that before you start investing, consider several key factors that will impact your investment strategy. Start by defining your financial goals and timeline. Are you saving for a short-term goal, such as a down payment in the next one or two years, or are you investing for long-term wealth, such as retirement?

Next, assess your risk tolerance and how it aligns with your goals. Higher-risk investments can offer greater returns but come with more volatility, while lower-risk options are more stable but may grow more slowly. Your risk appetite should reflect your time horizon and financial objectives.

The verdict: ChatGPT gave a solid, simple way to get going. But it skipped some other easy options such as using a bank branch or mutual funds and didn’t mention some important details such as contribution limits.

Score: 7/10

Bruinsma: This is exactly how I plan my vacations with my kids. Eating dinner at the Airbnb rental some nights, setting daily spending targets (rough ones) so we don’t overdo it and avoiding expensive hotels. The last thing you want is to come home to a massive credit card bill that you didn’t expect. The travel insurance comment is a little misleading. This insurance is mostly for medical expenses or trip cancellation or disruption. It doesn’t cover all unexpected expenses and you need to read the terms of the policy carefully, especially if you have this insurance through your credit card provider (which is common).

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Anna Judek, owner of Zebrano Travel, a Toronto-based luxury travel concierge: People can also think about when is the best weather for touring or activities, when can you typically get the best pricing, best tour guides and best dining. Shoulder seasons are often popular and a smart choice. I would be careful and would not recommend short-term rentals and house-sitting – these can be risky and we have heard horror stories about fraud in this space. Look for a hotel brand you know and trust. Look for places that include breakfast – there’s great value in that. Travel insurance is a must, even with the best planning in place.

Macmillan: I would also include that if you’re flexible about your next vacation destination, I’d recommend monitoring flight and hotel deals during the shoulder season when prices typically drop. Choose accommodations close to your main attractions to minimize transportation costs.

The verdict: ChatGPT nailed most of it: Use rewards points, book off-season, set a daily budget and get travel insurance. Experts agree but remind people that travel insurance mostly covers medical or cancellations, not everything, and that some cheaper lodging options can be risky.

Score: 8.5/10

Felix: Holding effective tax rates, including government benefits and clawbacks, constant, the RRSP and TFSA behave nearly identically. It is less about your current income level in absolute terms that tells you which account type is better to use, and more about your current effective tax rate relative to your expected future effective tax rate. I would have trouble assigning a rule of thumb based on absolute dollar amounts of current taxable income. Another important point is that future tax rates are unknown. The TFSA hedges future tax rate risk while the RRSP is exposed to it. Research based on U.S. data on account types similar to the RRSP and TFSA suggests that both accounts should be used by high-income individuals to hedge future tax rate uncertainty.

Macmillan: I disagree with the advice that you need to earn more than $80,000 to benefit from an RRSP. In my view, TFSAs and RRSPs both become viable options once you earn more than $50,000 to $60,000 annually. The RRSP becomes especially valuable because the tax deduction can help prevent you from moving into a higher tax bracket. This makes it even more worthwhile if your employer offers matching RRSP contributions.

The verdict: ChatGPT simplified this one too much by saying it depends on your income level. Experts say it’s really about your current tax rate compared to your future one, which is trickier to figure out. They also say it’s smart to use both accounts to spread out your tax risks.

Score: 5.5/10

Bruinsma: A more fulsome answer would involve figuring out what your savings goal is for education. Do you want to make sure you can pay for four years of university living away from home? If so, the $2,500-a-year contribution to get the $500 grant might not be enough. I love that ChatGPT mentioned investing the money.

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Nwaerondu: The answer doesn’t say that missed contribution years can be caught up one year at a time allowing you to receive up to $1,000 of grant room in a single year. This allows individuals with children who are older and have never set up an RESP to still try to maximize available grant room prior to age 17.

The verdict: ChatGPT gave a clear answer about RESPs and the government grants, but it was vague on how to get the full grant and missed that you can catch up on missed years.

Score: 7.5/10

These answers have been edited and condensed.