After years of fair economic weather and plain sailing, Australian households have hit a reef. Rising fuel and food prices, higher mortgage repayments and lower investment returns have punched a hole in budgets already weighed down by excessive spending, much of it on credit.

There are only two options if you want to plug a leaky household budget, says Desiree Fraser of Count Wealth Accountants - earn more or spend less. Winning a pay rise or working an extra shift is not always feasible, so trimming spending is often the best option.

But after so many years of economic growth and cheap credit, Fraser believes people have forgotten how to budget. "People say, 'I'm on good money, I shouldn't have to live like this,"' she says. But taking control of your household spending can improve your quality of life, not detract from it.

Amanda Reed, senior policy officer with the Australian Financial Counselling and Credit Reform Association, says before you can save you need to know exactly how much you are spending and what you are spending money on.

As a first step, financial advisers all suggest you carry a notebook around with you and jot down everything you spend for two to four weeks. "From that exercise, you can begin to plug the leaks," Reed says.

The recent focus has been on petrol, food and mortgage repayments. However, most people who keep a daily log find it's the little things that count - your morning coffee and newspaper, a lunchtime sandwich, even phone calls.

Five takeaway coffees a week can add up to $15, or more than $700 a year. Add a bought lunch and the figure rises to more than $3000 a year. Taking a packed lunch to work just two days a week could save nearly $1000. Reed says small changes in habits can make a big difference. Rather than buying bread and milk at the corner store, shop at the supermarket. Preparing food at home rather than buying prepared meals or giving the kids money to buy lunch at school every day will also save cash.

If the kids are putting on pressure to spend, Reed suggests using cash on shopping trips rather than plastic, so they learn that there is a limited amount of cash to buy what is needed and, when it runs out, that's it.

"The problem with plastic is that kids have no idea where the money's coming from - they think you just wave a piece of plastic to get what you want."

Reed advises having a talk with the family about the difference between needs and wants and involving the kids in the drive to cut unnecessary spending.

Fraser agrees. Her seven-year-old son is saving for a family holiday in Fiji and recently asked if she needed or wanted the expensive brand of hair conditioner she dropped into their shopping trolley.

Budgeting involves changing your mindset, as much as behaviour. Fraser encourages clients to change their attitude from an open-wallet policy where they buy it if they want it, to budgeting and allocating a dollar amount to various items (see case study).

Similarly, Fraser says if you take a list and an allocation for food to the supermarket you tend to tally up your purchases as you go. "I ask clients when was the last time they put something back on the supermarket shelf because it was more than their budget allocated.

"Budgets don't work unless you include absolutely everything, including an allowance for 'TAS' [there's always something], which ought to be around 10 per cent of your income."

Reed says once you know where your money is going you can identify savings but the experts warn against overdoing it. "Saving money is like exercising - if you overdo it you won't stick to it."

Around the home

There are lots of cost-cutting measures you can take around the house that the family will barely notice, such as turning appliances off at the wall.

"Standby [power] is the equivalent of a dripping tap and does add up," Reed says. She also suggests checking the thermostat on your heating. "If it's above 20 degrees you might as well pour money out the window. Every degree of temperature increases [power use by about] 10 per cent," she says.

Environmental consultant Alan Pears says a lot of savings can come from low-cost actions. A water-efficient showerhead typically repays its cost in less than a year, while buying a more efficient appliance when replacing your old one is often a low-cost measure.

"We are also finding that there are many savings opportunities in newer homes that come from just switching off or better managing wasteful systems," he says. "For example, some homes now have up to 10 halogen outdoor lights running on an automatic control at night. For six hours a night [that costs more than $200 a year]."

"Likewise many old second fridges running in garages are actually faulty, although they still keep drinks cold. Switching one off can save $200 each year," Pears says.

With petrol prices above $1.60 a litre and rising, one of the biggest drains on the household budget is sitting in the driveway. Say you drive 20,000 kilometres a year, Pears says that by replacing a large 4WD with a cheaper, energy-efficient hybrid Prius you could save $3200 a year on petrol alone, plus savings on depreciation and finance.

Banking

The rising cost of living has a way of creeping up on you but the act of gathering a full year's expenses to prepare your tax return can often reveal where the biggest money leaks are.

The new financial year is a good time to check whether you are getting a good deal with insurers, utilities, telcos and your bank.

Many people can claim bank fees as a tax deduction but it can come as a surprise to find you have paid more than $100 just to operate your transaction account for a year. One way to save on bank fees while earning more interest is to combine your everyday transaction account with a high-interest savings account.

Cannex analyst Peter Arnold says BankWest, NAB, Home Building Society and Nurses First Credit Union are among the institutions with attractive combination deals. These deals typically require you to deposit a salary of $2000-$5000 a month into your transaction account, which will be fee-free. This account is then linked to a high-interest savings account, currently paying interest of up to 8 per cent.

If you have a mortgage, consider bundling it with a credit card and transaction account with an institution that has so-called wealth packages. The big banks all have wealth deals, which currently have a discount on the standard variable home loan of 0.4-0.7 per cent. The bank waives transaction fees and annual credit card fees and in return you pay an annual package fee of $300-$500.

Consumers need to do their own sums but Cannex estimates someone with a 20-year package home loan of $250,000 could save more than $1300 a year in interest, more than covering the cost of the annual fee. The larger the loan and the longer the term, the more you can save.

Reed says people feeling the pinch tend to think they must pay the mortgage first and they'll often live off their credit card to do so. "But that credit card debt could eventually lose them their house," she says.

"If things are getting tight, talk to your creditors, utilities and bank. If it's a short- to medium-term problem and you've had a mortgage for years, you can ring the bank and they'll give you a couple of months' holiday, which may be enough time to knock off your credit card debt," Reed says.

Insurance

Fraser recently reviewed a health insurance policy for a client, a policy she thought was the same as hers, but discovered the client was paying $30 a month less. When she checked her own policy she realised she was covered for IVF and hip and knee replacements and other items she didn't need. As a mother of three, she didn't need the former and was still too young to require the latter.

Fraser reduced her monthly premium from $199 to $160 simply by phoning her insurer and arranging to exclude items she didn't need.

Just as your health insurance needs change over time, so does your need for life insurance and various forms of car and property insurance. It's worth checking all your policies periodically, not only to make sure you have the right level of coverage but also to check that you are still getting value for money.

Fraser says life insurance premiums have come down in recent years so if you haven't reviewed your policy recently you may be paying too much.

You can also save money by holding life insurance inside your super fund rather than outside. "The premiums [inside super] will eat into your retirement savings but it is a good option for someone on a tight budget because it will save some cash flow," she says.

"History tells us that the first sectors to feel a recession or depression are insurance and taxis," Reed says, because that's where people cut back spending. However, she says dropping insurance to save money is a false economy, especially if you have a car or a mortgage. "If you drop comprehensive car insurance, make sure you have third party property."

Barbara Drury is the author of Sorting Out Your Finances For Dummies (Wiley) $29.95.

And now for the good news...

Australian households are in the grip of a two steps forward, one step back economy. The cost of living has been rising steadily, pushing inflation to its highest level in 12 years - it rose 4.2 per cent in the year to March - while wages have been rising and taxes falling for six consecutive years.

CommSec chief economist Craig James has done the sums to work out what it means.

Take Joanna Citizen, an average wage earner who took out an average home loan in 2002. Since then, the rising cost of food, petrol, mortgages and other consumer items has added $287 a month to her living expenses.

Yet after taking wage rises and tax cuts into account, she would be $427.64 a month better off today.

However, James says these figures don't take into account price hikes for gas, electricity and water in many states that took effect on July 1.

But there's a bit of flab in the household budget if you're still determined to trim the fat.

There were gains from clothing, where prices have fallen 7 per cent over the past four years while real spending rose by 29 per cent because we're buying more.

Gadgets, such as computers, digital cameras and iPods, take a bigger slice of household budgets these days than petrol.

The Reserve Bank of Australia has an inflation calculator on its website which will calculate the rise in your household costs. For example, it shows a representative basket of goods and services that cost $10 in 1970 would cost $26.93 in 1980 and $58.71 in 1990.

See http://www.rba.gov.au/calculator/calc.go.

Limited funds but plenty of good cheer

Megan Klinkenberg is a nurse and single mum. As many single parents do it tough and even two-income families are struggling to make ends meet, Klinkenberg is a cheerfully confident money manager whose budget stretches to holidays and private school fees, thanks to careful planning.

"I have two kids, aged four and two, and we're looking at private school for the eldest next year so I'm budgeting for that," she says.

"My father's a banker and drilled into us the importance of saving, having no debt and working for what you need. I worked two jobs through uni to pay my fees upfront, rather than having a HECS debt.

"When I married and had kids and a mortgage I needed to learn how to manage [my finances] better because I suddenly had bills I'd never dealt with before."

That's when she went to financial planner Desiree Fraser for help. Klinkenberg learned how to divide a full year's expenses into a weekly amount so she would know exactly how much she needed to put aside for everything from insurance to dry cleaning.

"To sit down and compartmentalise it is brilliant. Now I'm paid fortnightly so I [allocate money to budget items] on a fortnightly basis," she says.

Klinkenberg lives on $300 a week for petrol, food and incidentals and everything else is set aside, written down in an old-fashioned ledger book. That way, she can look at her ledger at any time and know exactly how much she has saved for home and contents insurance, holidays and the like.

Once she knew what she was spending, Klinkenberg looked for ways to trim expenses. She saved $80 a month by bundling her phone and internet service, while Fraser helped her shop around for the best insurance deals and made additional savings by bundling policies with a single provider.

"At the moment the kids are having swimming lessons and I can use my health fund for that. A lot of people don't know what they can claim from their health fund."

Eighteen months ago, when interest rates began to climb, Klinkenberg shifted her mortgage to a fixed rate. "That was a godsend. I've got a 6.9 per cent rate and friends are paying 9 per cent," she says.

Interest-free consumer finance is a trap for poor money managers but Klinkenberg finds it's a good way to pay things off over time, provided you budget to pay the full amount within the interest-free period. "I've done that with fridges, bedroom suites and appliances and it's worked well," she says.

She has also switched bank accounts. "I don't incur bank fees if I don't go into a branch. I got into trouble putting coins into the ATM and got a nice phone call from the bank asking me not to do it because it would break the machine," she laughs.

The self-confessed "garage sale queen" buys most of the children's clothes a season ahead at stocktake sales and is a keen user of online auction and swap sites.

Klinkenberg also has a policy of having only one loan at a time, so she paid off the car before buying a house. "It's really empowering to know I own this, I've done this," she says.