What is a Balanced Budget?

A balanced budget exists when a household's (or country's) revenues are equal to its expenses.

How Does a Balanced Budget Work?

For example, let's assume that John Doe and his wife Jane Doe earn $100,000 a year. Jane analyzes the couple's expenditures for the full year and discovers that they have spent $106,000. Because the couple's expenses exceed their revenues, John and Jane do not have a balanced budget.

In some cases, people or countries spend less than they take in, which creates an opportunity to save or pay down debt. In those situations, people might say a balanced budget exists because at least expenses don't exceed revenues.

Why Does a Balanced Budget Matter?

In personal finance, a balanced budget is one of the most basic steps to financial freedom. In government, a balanced budget can be one of the most controversial, contentious hot buttons, because taxpayers and politicians often argue about where to cut spending or how to invest surpluses.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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