What is a zero-based budget?

A zero-based budget is a budgeting method where every dollar of income is allocated to specific expenses, savings, or debt payments, ensuring that all income has a designated purpose. This approach requires individuals to plan their finances carefully so that their total income minus total expenses equals zero at the end of the budgeting period. The essence of this method lies in the meticulous tracking of income and expenses, promoting a clear understanding of where each dollar is going and helping to avoid unnecessary spending.

By assigning a specific purpose to every dollar earned, individuals can prioritize their financial goals and make informed decisions regarding their spending habits. This encourages discipline and enhances financial awareness. Hence, the correct choice highlights that a zero-based budget assigns an expense to every dollar of your income, emphasizing the importance of thoughtful financial planning and management.