| Written March, 2007 |  |
File C3-51 |
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Managing Farm Family Finances
William Edwards, extension economist, 515-294-6161, wedwards@iastate.edu, Cynthia Needles Fletcher, extension specialist, 515-294-8521, cynthia@iastate.edu
Do you find it difficult to know how much to spend each month for family living needs? Many farm families do. For many farmers, income is both irregular and unpredictable. Although living standards on the farm have become more and more comparable to those of non-farm families, there are some important differences in managing farm family finances.
Differences
- Income is irregular and uncertain. Except for some enterprises like dairy and poultry production, farm income fluctuates widely and is often received in a few large amounts. Prices and costs can vary widely from projected levels.
- Housing expense is often low. For many farmers a large portion of their housing costs is included in the farm rent or mortgage payment.
- Food expenditures may be lower than for non-farm families. Home gardens and homegrown meat and produce can trim grocery bills.
- Insurance and health costs may be higher. There are usually no employers to pick up part of the cost of employee insurance plans.
- Farm and home compete for surplus cash. Deciding whether to reinvest profits in the farm business or to make expenditures on the home or family is a difficult matter for young farm couples.
- Household expenses are small compared to farm expenses. Controlling family expenditures may be difficult when a farm couple is accustomed to spending large sums for farm inputs.
- Business items are tax deductible. Many items, such as vehicles, office equipment, machinery, and travel expenses, can be at least partially tax deductible but are often used for family purposes as well.
Cash Flow
What are the major sources of cash income in your farming operation?
When are they most likely to occur?
Source of Income Likely Months
_____________________________________ ____________________
_____________________________________ ____________________
_____________________________________ ____________________
_____________________________________ ____________________
With this information, you can begin making a cash flow budget for your family. By adding your best estimate of possible selling prices you can project cash inflows or income. Subtracting your best estimates of costs for feed, seed, fuel, chemicals, hired machinery and labor, livestock, repairs, taxes, and other expenses tells how much will be left over for paying debts and family living expenses. It also helps to estimate how much short-term borrowing will be needed during periods of little or no income.
Have you ever made out a cash flow budget for your farm?
Have you made out a cash flow budget for this year?
Tips on cash flow budgeting can be found in Information File Twelve Steps to Cash Flow Budgeting.
Household Budgets
Have you ever made a household spending plan?
A careful estimate of how much is needed each month for family necessities is important but not easy. Projections of expenditures for food, clothing, personal items, health, education, home maintenance and utilities, education, transportation, and giving can best be made from your own past records.
If past records are not available, some average figures from other farm families may be a good starting point, such as are found in Extension publication FM 1790, Family Living Expenditures of Iowa Farm Families. For details on how to set up a household spending plan, see the Extension publication PM 1454, Money Mechanics: Spending Plans.
How much do you estimate your family spends each month?
During which months is spending greater than the average?
Item Monthly Expenditure Highest Months
Food, including restaurants $____________ _________________
Clothing and personal items $____________ _________________
House utilities and repairs $____________ _________________
Recreation $____________ _________________
Gifts and donations $____________ _________________
Transportation $____________ _________________
Education $____________ _________________
Life insurance $____________ _________________
Were you unsure about some of your answers? Projection and control of family living expenses is difficult without records of past spending habits. Many farm record books contain sections for recording living expenses. Family account books are available at extension offices. Programs are available for home computers, which make it easy to sort and summarize expenditures. However, both handwritten and computer records need to be updated regularly.
Adjustments
You may need to adjust last year’s expenses due to changes in the family situation, such as a child entering school or a debt repaid. Adjust for inflation by increasing the previous year’s expenditures by a projected rate.
What expenditures did you make last year, such as for a car, furnace, or preschool tuition, that you will not have to make this year?
Item (last year) Cost for the Year
_______________________________________ $ ________________
_______________________________________ $ ________________
_______________________________________ $ ________________
Total $ ________________
What expenditures will you have this year, such as school lunches, car payments, and dental work, that you did not have last year?
Item (this year) Cost for the Year
_______________________________________ $ ________________
_______________________________________ $ ________________
_______________________________________ $ ________________
Total $ ________________
Separate Accounts
Do you have separate bank accounts for family and business expenditures?
Budgeting, financial record keeping, and income tax preparation are all simpler if a farm business bank account is set up separately from the family account. Money can be transferred from the business account to the household account according to your spending plan. Household expenditures can be monitored easily.
When no farm income is anticipated for several months, it may be useful to place some funds for future living expenses in a separate savings account. Gradually transfer them to the home account to discourage unnecessary spending.
Setting Goals
Most families have a want list for such things as a family vacation, home improvements, or a recreational vehicle. Below list some possible extra expenditures you might make for the household, individual family members, or the farm enterprise, if income permits. Estimate the cost. Decide what priority you’d give this expenditure. Compare your ideas with those of other family members.
Item Cost Priority—High, Medium, or Low?
Household _________________ $ __________ ______________
__________________________ $ __________ ______________
Personal __________________ $ __________ ______________
__________________________ $ __________ ______________
__________________________ $ __________ ______________
Farm _____________________ $ __________ ______________
__________________________ $ __________ ______________
Establish a System
Does your family have a system to decide how income will be divided between farm and family expenditures?
Or does this present a conflict each time farm income is received?
Deciding how to allocate income between farm and home before it is received can prevent conflict. Here are some examples:
- Earmark a fixed percentage of all farm sales for family use. For many farm families, 10 percent may be reasonable. For high sales, high expense enterprises, such as cattle feeding, a lower percentage may be sufficient.
- Transfer a fixed amount to the household account each month for basic necessities. At the end of the year, allow a certain proportion of net farm income (10 to 15 percent, for example) for nonessential household expenditures during the following year. Use your list of priorities as a guide.
- Where off-farm income is available, it may all be channeled into the family expenditure account. Or certain enterprises on the farm, such as the sale of cows, dairy calves, or extra crops, may be designated for extra family living income.
Budgeting Labor
Especially during peak farm work periods, the time and labor of family members may have to be budgeted between farm and home activities. Major household projects can be scheduled for months when the farm work load is less demanding. Scheduling work activities will probably result in less conflict than putting jobs off until time permits. Some household expenditures, such as hiring a child care giver, may actually increase the hours of labor available for farm work.
Additional Considerations
Will failure to make certain household improvements result in higher maintenance or operating costs later?
Should household expenditures be financed with credit? How do consumer credit interest rates compare with farm interest rates?
Do your itemized personal tax deductions exceed the minimum standard deduction? If not, it is more profitable to borrow for farm expenses (business interest is always deductible) and pay cash for non-business expenditures.
Can personal expenditures, such as travel and meals, be combined with business activities to make them tax deductible?
Do you pay your spouse or children a reasonable wage for farm work? This can result in lower income and social security taxes. Spouses can set up their own retirement accounts, too.
Summary
Carefully budget farm income, farm expenses, and household expenditures.
Verify budgets through actual records. Separating farm and home bank accounts makes this easier.
Set realistic spending goals and priorities.
Develop a system for allocating income and use it.