1 Big Budget Mistake You Can't Afford to Make This Year

Following a budget is great, but be sure yours is accurate.

Sticking to a budget is important for a number of reasons. First, by following a budget, you get a better sense of where your money goes month after month, which could lead you to smarter spending decisions. Having a budget could also make it easier to build up your savings and stay out of debt.

But if you're making the effort to have a budget, that budget should be spot-on. And if you don't adjust your budget this year, you could hurt yourself financially.

Why you must tweak your budget now

Whenever your expenses change, it's important to rework your budget to account for them. For example, if you move from a less expensive home to one with a higher rent or mortgage payment, that's a switch your budget should take into account.

This year, the cost of living has gone up a lot due to inflation. It costs a lot more to fill up your car, buy groceries, purchase clothing, and cover most essential purchases.

In fact, the cost of living has gone up so rapidly and so substantially that many people feel like they've taken a pay cut. If you don't adjust your budget to reflect your higher costs, you could end up in debt or constantly dipping into your savings just to make ends meet.

Say you normally spend $20 a week to fill up your car. These days, you might be spending $25 per week. That may not seem like a big difference, but remember -- that's just one expense that may have risen. And if you're also spending an extra $20 a week at the supermarket, you're suddenly looking at an extra $100 a month.

How to fix your budget

You may not realize exactly how much more you're spending on essentials. To get at that information, go through your credit card and bank statements from the past three or four months and see what your bills average in each spending category. Then plug those numbers into your budget and see where it leaves you.

If you're still able to cover your monthly bills based on your current paycheck, you may be fine to make no changes to other items in your budget. But if you're now spending more than what you bring home from work, you may need to make adjustments by getting a cheaper cable plan, for instance, or cutting back on social activities.

Unfortunately, inflation could be here to stay for the rest of this year and even into 2022. A good way to protect yourself is to reflect those higher costs in your budget. You may need to temporarily make lifestyle changes to deal with inflation, but that's a better bet than eating through your savings or driving yourself into debt and struggling to escape it.