Abstract Background South African households are severely affected by human immunodeficiency virus / acquired immunodeficiency syndrome (HIV/AIDS) but health and economic impacts have not been quantified in controlled cohort studies. Methods We compared households with an HIV-infected member, and unaffected neighbouring households, in one rural and one urban area in Free State province, South Africa. Interviews were conducted with one key informant in each household, at baseline and six months later. We studied 1913 members of 404 households, with 94% and 96% follow up, respectively. Household and individual level analyses were done. Results Members of affected households, compared to members of unaffected households, were independently more likely to be continuously ill (adjusted odds ratio (OR) 2.1, 95% CI 1.3–3.4 at follow up), and to die (adjusted OR 3.4, 95% CI 1.0–11), mainly due to infectious diseases. Government clinics and hospitals were the main sources of health care. Affected households were poorer than unaffected households at baseline (relative income per person 0.61, 95% CI 0.49–0.76). Over six months expenditure and income decreased more rapidly in affected than in unaffected households (baseline-adjusted relative expenditure 0.86, 95% CI 0.75–0.99 and income 0.89, 95% CI 0.75–1.05). Baseline morbidity was independently associated with lower income and expenditure at baseline but not with changes over six months. Conclusions HIV/AIDS affects the health and wealth of households as well as infected individuals, aggravating pre-existing poverty.