Explain Personal Financial Management Techniques | Small Business

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Personal financial management is an important concept for many individuals and business owners. Personal finances often dictate how a person lives his life and what decisions to make as an entrepreneur or business owner. Assessing personal finances should be done in a method similar to assessing business finances. Many of the same financial principles are applicable, albeit on a much smaller scale. Several types of personal finance management techniques or tools are available to individuals.

Personal Financial Statement

A personal financial statement lists all assets owned by the individual and any money owed to creditors, banks or lenders. This financial statement is very similar to a company’s balance sheet. Individuals can use this information to assess their net worth and how much debt is owed to other people.

Many individuals owe money on significant assets, such as homes, vehicles, boats or other similar items. The net worth of these items may be calculated by taking the appraised or current market value less money owed for these items. This analysis presents a net worth for all major assets owned by individuals.

Budgets

Budgets outline all money received from an individual’s job or other cash-generating assets and all expenditures made during a specific time frame. Budgets provide individuals with a cash management tool for analyzing income and expenditures. Understanding where and how cash is spent is an important part of managing personal finances.

Dave Ramsey, a nationally syndicated financial radio talk show host, promotes the use of budgets for personal financial management. Writing down every dollar spent on various items often provides individuals with a shocking picture of how they spend money.

Individuals can also create budgets to set specific spending limits on the needs and wants in their life. Major expenditures, retirement or other savings is often implemented in the individual’s budget to ensure money is saved for later expenses or other emergency needs.

Debt Snowball

An increasingly popular personal financial management technique is the debt snowball. Ramsey promotes the debt snowball method on his radio show and financial management materials as a way to repay personal debt. Ramsey suggests individuals list all debts owed to creditors, banks and lenders in order from smallest to largest. The debt snowball presents individuals with a plan for repaying these amounts in a logical manner. Once a budget is created and individuals carefully follow the spending plan associated with the budget, individuals can focus on repaying their debt.

Starting with the smallest debt and working their way toward the largest debt usually provides individuals with a sense of accomplishment when repaying loans. Once the smallest debt is paid off, individuals should have more money for repaying the next debt. This process will often continue until the final debt is paid off.

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