Farm Horizons, April 2018
Family living what is it?
By Myron Oftedahl
By the time you are reading this, the numbers for 2017 Farm Income and Family Living will have been released, and the Family Living expenses that are reported often create some confusion.
Farmers look at that number and say to themselves, “My family living is not that high.”
Off-farm folks look at that number, and think that farmers live pretty well.
Let’s start by looking at what is included in that number.
The average for the 2017 Minnesota Farm Business Analysis for southern Minnesota will show a value of $87,463. Included in that amount are $28,297 that was spent on income taxes, household furnishings, non-farm vehicles, non-farm real estate, house repairs, and some savings. This leaves family expenses of $59,601. This amount covers groceries, health costs, personal care, household supplies, etc.
How does this break down, and how does your family living expenses compare?
When I first started this job, one of the farms that I was working with gave me a copy of an article that documented family living expenses for Iowa farm families in 1999. Now, I think that it is safe to assume that family expenses in Iowa would compare to family living expenses in Minnesota, so I have been tracking this through the years.
The comparison looks like this:
1999 2008 2017
Family Living $58,002 $54,566 $59,601
Food 6% 13.3% 13.6%
Clothing & personal 18% 10.4% 9.99%
Health 15% 14.9% 16.5%
Gifts & contributions 11% 7.4% 8.0%
Recreation & education 11% 10.5% 9.78%
House operations 13% 18.2% 18.2%
Personal auto expense 9% 6.8% 5.55%
Life Insurance 7% 4.3% 6.4%
Other 14.7% 11.6%
(includes child care, alimony, personal interest, and miscellaneous)
How many of you know what you spend on groceries and meals each year? I am actually surprised that the percent spent on health care was not higher, but this is an average of 352 farms that reported family living. If I look at the health care expense on the high range, it comes out to 22.5 percent.
Now, you could argue that I am not comparing the years equally, and I will admit, none of this chart has been adjusted for inflation, value of the dollar, or any other adjustments that you will sometimes see economists make. These are the raw values for each year, and the averages for usually about 350 farms. Whenever I convince a farm family to track their family living expenses, usually the first comment that I hear is that I can’t believe that we spent that much on food, or kids’ diapers, etc.
You have read, and will see many more articles about controlling family living expenses when the farm’s cash flow and profitability is low. Telling you to cut family living expense and actually doing it are two different things. Every family has a certain level of wants and needs when it comes to family living, and we tend to live up to our means. In other words, if you got a raise this year, you are likely to spend more money on family living, whether it is to go out more often, take a longer vacation, remodel the house, and the list could go on and on.
So, how can you control or reduce family living? I believe that every farm should have two checkbooks, one for the farm and one for personal.
If you take a salary from the farm each month, and transfer this to the family checkbook, now you have to live within that salary.
The key here is to make this a reasonable amount. This amount will be affected by any off-farm income that comes into the family checkbook, and what the farm can afford. This will be different for every family.
Most lenders will use $24,000 per year for family living, until we can determine what it actually is. So, if you were to draw a $2,000 a month salary from the farm, this is what would cover food, clothing, health care, home heat, electric, etc.
Often, one of the hardest things to do with a farm family looking at a transition is to determine what the elder generation will need for family living when they retire and/or move off the farm. This is because the farm pays for many of the expenses for family living, the electric bill is for the entire farm, the telephone bill is for the entire farm, the loan to remodel the house may be included with another building purchase or a piece of machinery. We butcher a steer, but never pay the farm for it. You can probably think of many more examples.
As the saying goes, you can’t manage something if you can’t measure it. I challenge all of you, whether you are living on a farm or not, to start tracking your personal expenses and see how you compare to the above average percentages.
If you are a farm or business owner, you need to have two checkbooks to keep things separate. If you are on the farm and have one electric bill, try to determine what percent of the electric is for the house and charge that portion to the house. You are probably doing that for taxes anyway.
If you would like some help, there are some good personal budget sheets available, and most of the accounting software has the capability of tracking personal expenses.
Now comes the hard part you need to live within your means. It will be tempting to go back and make an additional draw from the farm, but don’t do it! If you truly want to reduce spending on family living, you need to take a serious look at wants vs. needs. You may need to prioritize some purchases.
Also, keep in mind, that the standard recommendation is to have enough savings to cover three to six months of expenses, in the event you lose your job, or need to make a major repair. Do you have that much in savings? Give yourself a challenge this year, and keep track of your personal/family expenses and see how you compare.
Have a profitable day!