Anyone who has taken a course in economics has some familiarity with the role that time value of money (TVM) plays in finance. Interest rates and required rates of return carry a great deal of influence on the economy and its constituent consumer bases. And while the rate on your student loan or MMDA is surely important, it has minimal impact on day-to-day financial decision making. More relevant to the average consumer are the short-term, time-based concepts of liquidity and cash flow.
When you, as a consumer, assess whether you can make the Homecoming trip back to your alma mater, or have the means to simultaneously pay off credit card debt and deposit funds into a brokerage account, you are evaluating your liquidity. Unfortunately, personal financial management (PFM) software like Mint has disregarded these seemingly simple needs, with the exception of some basic alerting features. The result? Uninformed financial decision making that results in overdraws and reduced saving.
The fact is this: many consumers just need a better way of determining how much they can afford to spend over the course of a weekend or a night out. While the financially responsible may have this covered through a reserve of ‘rainy day funds’ in their checking accounts, a large portion of consumers are reliant on their bi-weekly paycheck to pay bills and fund everyday expenditures. Thus, having an additional layer of transparency into the timing of income and expenses such as groceries, auto insurance and bar tabs can greatly improve short-term financial decision making.
Let’s take the example of being offered a $150 ticket to this Sunday’s Giants-Redskins game upon arriving at work on Monday. An app like Mint might give you an idea of the type of spending you can justify today but will typically fail to account for all of the financial activity taking place prior to the weekend, leaving you to manually calculate expected cash flow or, more likely, take a guess at whether you can afford the seat or not.
The dynamic PFM app would be able to clearly illustrate expected income and outlays based on a combination of that week’s schedule and your spending history. The app would factor in your credit card bill due on Thursday, the end-of-month paycheck on Friday and rent payment slated for Sunday. By syncing in with your phone’s calendar, the app could facilitate the scheduling of expenses like that round of golf on Saturday afternoon. And by tapping into the transaction history of your financial accounts, the app could forecast daily expenditures (like meals and cab fares) with reasonable accuracy.
With this type of liquidity and cash flow management, the practicality of going to the game suddenly becomes much clearer. Such is the vital role that time plays in PFM, one that has the potential to extend to management of loyalty reward expiration and allocation of expenditures across time periods. And while the market has been generally lacking in the type of solution described above, PNC’s Virtual Wallet may be the product best-capable of meeting these liquidity and cash flow management needs right now.
The Rub: The component of time in consumer spending has been overlooked in personal financial management offerings to-date and must be addressed in products that come to the market in 2014.