• ZISK

Tight Times? Make Sure You're Living Within Your Means

August 25,2020


Jennifer Shike





In times of tighter margins, it’s more important than ever to know that you are living within your means. Are you spending less each month than you are bringing in? Just as every farm is unique, so is every family’s needs when it comes to living standards. 


“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.


He says it’s beneficial to know the cash flow requirements of both your farm and family for many reasons. Not only is it good practice to know what those costs are to help you do an entire farm family budget, but it also could be helpful if you need a loan for a capital purchase or operating note. 


“This is information that a lender will need to calculate your loan repayment capacity as it takes farm income, income taxes and family living into account. Tracking family living costs can help you see the cost of health care and help you analyzing the impact of different insurance plans as well,” he adds.


Compeer Financial estimates that 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 like daycare or college tuition.


Determine Family Living Costs The first step is to define family living costs. Contributions, medical expenses, insurance (life and disability), 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.  


The first question Zwilling would ask to distinguish family living costs versus farm expenses is simple. If I wasn’t on a farm, would I still have that expense? If so, then it is a family living expense, he says.


But the best advice he can offer is to follow the IRS publication 225, Farmer’s Tax Guide.  

“The Farmer’s Tax Guide is a good publication to identify the main farm expenses, but there are still some questions left unanswered,” he 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. For budgeting or calculating throughout the year, you can come up with a percentage to use from year to year for calculating family living,” he says.


For family expenses that are joined with farm expenses, such as a vehicle, Compeer Financial says it’s a good idea to estimate how much of that “expense” is used for work as compared to personal reasons. Determine a percentage, then allocate that percentage of costs to your family living costs.


Track Expenses Now, find a tool to track these costs. Farmers utilize some type of recordkeeping system for taxes, so consider using this to track items for taxes and for all expenses that flow in and out of your farm and family checkbook. 


Zwilling says this will help you avoid missing any farm expenses while helping you track non-farm income (such as off-farm wages) and family living costs.


“At minimum, you can create a spreadsheet and look at your receipts and classify them into the categories above. If there is something that you want to keep track of in more detail, you can add that as well as a sub-category,” he says. “If it’s a non-farm cost, but you are not sure what type, call it a family living expendable.”


If you use credit/debit cards, Zwilling suggests using one for the farm and another for family living expenses to make it easier to track differences.


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 3 to 6 months. 


The Most Common Mistake Keeping records up to date is one of the greatest challenges to determining an accurate cost of family living, Zwilling says.


“It is best to do this no less than monthly when the bank statements are available, and you are reconciling your accounts. Consistency is the key,” he 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 you with that determination.”


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