Zero-Based Budgeting

Form of budget or spending plan wherein every dollar of expected income is given a "job," or outflow. In zero-based budgets, if any amount of income or outflow changes, a corresponding change of equal value must take place in some other income or outflow.

Above is shown the Smith household's zero-based budget, which they created at the beginning of the month. During the month, the Smiths discover that they must spend an unplanned $10 on clothing. This $10 must come from somewhere inside the budget: They can increase their income by $10, or reduce some other expense by $10. In this case, the Smiths elect to reduce their planned savings by $10.

In a zero-based budget, income minus outflow must always equal zero.

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