In southwestern Victoria a large number of lakes are scattered across the volcanic plains; many have problems with increasing salinity. To identify the hydrologic components behind this problem, three lakes, Burrumbeet, Linlithgow and Buninjon, were selected for detailed water and salt budget modelling using monthly values of rainfall, evaporation, surface inflow and outflow, and groundwater inflow and outflow (using the new modified difference method developed in this study). On average, rainfall begins to exceed evaporation with the onset of winter rainfall in May, so lake levels rise and lake salinities decline. The modelled lakes have become more saline over the last decade, a time of drought with below average rainfall, and all eventually dried out, their salinities rising to very high levels as they shallowed. Lake Burrumbeet is generally much less saline than Lakes Linlithgow and Buninjon, because it has substantial groundwater outflow, probably due to leakage through one or more volcanic necks. This limits the amount of time the lake water is subject to evaporation, and also allows significant salt export. The other lakes do not leak. The modelling indicates that when the lakes dry out, salt is lost from the lake-beds, probably due to wind deflation of salt crusts and leakage into the underlying groundwater. The removal of salt during drying-out phases resets the salinity of the lakes, limiting their ability to become more saline with time. Drying-out phases may therefore be essential in preventing the increased salinisation of lakes and wetland environments across the volcanic plains.