Rarely can a surge in commodity prices erase years of tight margins. Regardless of the farm economy, it’s important to live within your means.
“Knowing your family living costs are important because in most cases the farm will pay some of those costs as well,” explains Brad Zwilling, vice president of data analysis for the Illinois FBFM Association.
Not only is it good practice to know what those costs are to help you do a budget, he says, but it also could be helpful if you need a loan or operating note.
“This is information a lender will need to calculate your loan repayment capacity as it takes farm income, income taxes and family living into account,” Zwilling adds.
Compeer Financial estimates the average family will spend $25,000 per adult in the household and an additional $10,000 per child. However, these figures need to be adjusted for any large spends such as daycare or college tuition.
Verify Family Living Costs
The first step is to define family living costs. Contributions, medical expenses, insurance, capital and expendables are the main categories of family living costs, Zwilling says. Capital cost would include items such as appliances, roof repairs, etc. Expendables would be items such as food, utilities, recreation, entertainment, education and transportation.
To distinguish family living costs versus farm expenses, ask: If I wasn’t on a farm, would I still have the expense? If so, then it is a family living expense, Zwilling says.
Utilities seem to be the hardest to gauge, especially if the same meter or tank is used for the farm and home, Zwilling adds.
“Work with your tax preparer to see what costs they are using for a farm expense, and the remainder will be family living,” he says.
For joint expenses, such as a vehicle, estimate how much of that expense is used for work versus personal reasons. Determine a percentage, then allocate that percentage of costs toward family living.
Common Mistake
Keeping records current is one of the greatest challenges to determining an accurate cost of family living.
“It is best to do this monthly; consistency is the key,” Zwilling says. “If you are not sure, don’t skip it, enter it as a sub-category called ‘I don’t know’ and when it comes to tax time, you can review this with you tax preparer, and they can help with the determination.”
Ground Truth Your Expenses
Compeer Financial suggests using two separate bank accounts – one for farm expenses and one for personal/family expenses. Estimate your cost of family living for a month, and put that amount in the family account each month. After a few weeks, are you spending what you thought you’d spend? Keep track of adjustments and recalculate an average after three to six months.
