The building blocks of wealth

You can't get ahead unless you slam the brakes on spending. Barbara Drury looks at cost-cutting.

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."