At a recent young farmer and rancher event, I commented that monitoring family living budgets is just as important as farm budgeting and analysis. Some might say that this is an outlandish statement until one is engaged with agricultural lenders who are working through distressed farm loans. It is estimated that up to 40% of the debt restructures and refinances are related to overspending or the lack of size and scope of the business to accommodate the family living withdrawals from business earnings.
An examination of recent data on family living costs from Nebraska Farm Business, Inc. and FINBIN data finds that, despite the reduction in commodity prices, farm family living costs remain high. Family living costs peaked in 2012 at an average of $100,000 and dropped considerably to $83,000 by 2016. However, family living costs have since increased to $96,780 in 2018, which is nearly back to the level during the heyday years of farming and ranching. Dr. Steve Isaacs, an agricultural economist at the University of Kentucky and a good friend of mine, has a great perspective on family living costs. Based on the data, he found that family living costs will decline for two years after a considerable effort is made to curtail costs. However, costs will then increase back to their norm or higher within four to five years.
Big culprits for many farms and ranches are medical insurance premiums and overall medical costs. Farm record data finds that these expenses cost farm families between $15,000 and $20,000 annually. Combine medical expenses with child and dependent care for youngsters and seniors, and the financial burden can be demanding.
Our old friend known as the miscellaneous line item usually comprises 10% to 15% of expenses. This is a “catch-all” category that often needs close scrutiny if one wants to trim the family living budget.
Another factor impacting high family living cost is the number of generations or family members living from the business or seeking compensation. To be blunt, many businesses are not at the size and scope or level of profitability to accommodate all of the withdrawals. The result is often a run-up of credit card debt or the failure to pay down operating debt. The solution to high credit card debt and stale credit lines is often a refinance of these losses using real estate equity. Unfortunately, this solution destroys wealth for the existing generations and burdens the next generation.
One of the keys in developing a family living budget is to use one of the record systems for line-by-line guidance. Place your living costs on a monthly basis and add 25% for overlooked items. Some young producers are even tracking living costs on a daily basis using an app on their phone! One finds that daily family living costs will often range from $150 to $300 per day per family. These living budgets need to be included in the cost of production metrics as well for sole proprietorships and partnerships. For many family businesses and farming operations, personal and business spending go hand in hand in determining overall profitability and success.
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA, and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension, and other popular publications.