Taking Charge of FamiIy Finances

Managing Farm Family Finances

HE-452, February 1990

Debra Pankow
Family Financial Management Specialist

Do you find it difficult to know how much to spend each month for family living needs? Many farm families do. For most farmers, income is both irregular and unpredictable. Although living standards on the farm have become more and more comparable to those of nonfarm families, there are some important differences in managing farm family finances. This publication is designed to help the farm family take control of family living expenses by sharpening managerial skills.

The Farm Family is Unique

Although farm households are similar in many respects to the typical rural household, there are some unique and important differences in managing farm family finances.

1. 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 very large amounts. Prices and costs can vary widely from projected levels.
2. Household expenditures are small when compared to farm expenses. Many farm couples find it difficult to control family living expenses when they spend large amounts for the farm businesses.
3. Housing expenses are often lower than for nonfarm families. For many farmers, a large portion of their housing costs (mortgage payment, household operations, utility bills) are comingled with business expenses and included in the farm rent or mortgage payment.
4. Food expenditures may be lower than for nonfarm families. Family living from the farm -- meat, vegetables and fruits -- can cut grocery bills considerably. However, in families with a lot of in-town activities, there may be a considerable amount of food eaten away from home, adding greater expense to the food budget.
5. Insurance and health costs are usually higher. There is typically no employer to pay a portion of the insurance premiums.
6. Farm and home compete for surplus cash. It is often difficult to determine whether to reinvest farm business profits back into the farm business or to make expenditures on the home or the family. Decisions concerning farm and family goals should be made by the entire family.
7. Business items are tax deductible. Some expenses, such as vehicles, office equipment, machinery, and travel expenses can be at least partially tax deductible when used for the farm business even though they are used for family purposes as well.
8. Although transportation expenses are often related to the farm business and can be tax deductible, these expenses are often higher for rural families because of the greater distances they must travel to reach community services.

Setting Goals

Farm and family management tasks and responsibilities are difficult to separate. When farmers live where they work these two areas of management have a tendency to blend together into a complex interdependent unit. It becomes necessary for families to practice goal-directed management to achieve personal, family and farm business goals.

What do you want out of life? How can you best use your resources of time, money, talent and effort to achieve what you want? Your choice of goals, influenced by your economic situation, your abilities and skills, your attitudes, your values, your standards and your stage of the family life cycle should provide the answers to these questions.

Whatever they are, setting goals and establishing priorities among them requires a frank discussion involving all family mernbers. Having all family members involved can help make each member more sensitive to the family's total financial picture. It may also serve to increase each individual's commitment to decisions on how money is spent and what each person can do to help assure success. Think of involving the entire family as a critical foundation for taking control of your living expenses.

Below is a simple goals worksheet for your family to use in beginning to identify and prioritize your farm and family goals. By specifying the goal, when you want to accomplish it, the amount of money needed to reach it, and what will need to be saved monthly or annually, your family can begin to set some short- and long-term goals. Prioritize your goals within each category, then check to see if there is competition between goals in categories which compete for your family's resources. Adjustments and compromises will have to be made by the entire family.

Our Goals -- What We're Working Towards
-------------------------------------------------------------
					     Amount Needed 
						to Save
			   Date to  Money   ----------------
Goal		 Priority  Achieve  Needed  Monthly   Weekly
-------------------------------------------------------------
Personal Goals
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____

Household Goals
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____

Farm Goals
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____
________________  _______   _____   $_____   $_____   $_____
-------------------------------------------------------------

Charting Cash Flow

Now that you know where you want to go (your goals), you will need to make a cash flow plan to help you get there. A cash flow plan shows you the estimated timing and amount of both income and expenditures for your family. Time is a crucial element in budgeting. Successful budgeting will adjust expense timing to closely match that of expected income.

To deal with the household expenditures, look at each expenditure and total them to get an estimate of the amount you need to allow for family living each year.

Family living expenditures can be separated into two categories -- fixed and variable. Fixed expenditures are those which change very little from one year to the next. You can anticipate the amounts of money required and when the amounts are due. Examples are installment credit payments, medical and life insurance premiums, savings for emergencies and goals, and so on. Variable expenses, on the other hand, include food, home repairs, utilities, auto maintenance and personal allowances. Utilities, for example, vary by the season of the year and should be budgeted for in a way that reduces the shock of high bills.

It is important to include personal spending money for each member of the family as a fixed expense. Although a budget must be followed closely to be successful, it is important that each family member feels they have control over some portion of the family income.

Most people do not know the pattern of their current spending. If you are one of them, the best way to get started is to record expenditures made by all family members for at least one month. Keep the record in a place that is easily accessible to everyone, such as on the refrigerator door. A sheet of notebook paper will do fine for a start. Later, someone can divide the expenses by the categories in the budget. Good record-keeping of historical spending can be a basis for predicting future spending, or budgeting.

To help with recording expenses, pay as many expenses as possible by check. Be sure to keep track of where the extra cash goes if you write a check for more than the actual purchase. If you use the services of an accountant or a computerized record keeping service, computer printouts from your service can be used to help see where money has been spent in the past.

If you make a lot of purchases with cash or a credit card, keep receipts to help itemize your expenditures. The wisest use of credit is to pay your credit card balance when it is due. If you need help controlling your credit card use, contact your local county office of the NDSU Extension Service and ask for publication HE260, "Credit -- Using It Wisely."

In order to work, a budget must remain flexible. Comparing your actual expenditures to what was budgeted will allow you to see what categories you have under- or over-budgeted for, and will help you adjust the budget.

Separate Accounts

Do you have separate 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 much more easily this way. In addition, this has become particularly important with recent changes in tax laws regarding the allocation of personal and business interest expenses for farm families.

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.

Deciding how to allocate income between farm and home before it is received can prevent conflict. Here are some examples of systems for deciding how income will be divided between farm and family expenditures:

• Earmark a fixed percentage of all farm sales for family use. For many farm familes, 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 each year, allow a certain proportion of net farm income (10 to 15 percent) for nonessential household expenditures for the coming year. Use your list of priorities as a guide.
• Where off-farm income is available, it may all be channeled into the family account. Or certain enterprises on the farm, such as the sale of cull cows, dairy calves or extra crops may be designated for extra family living income.

There are additional costs in both time and money when separate accounts are set up, such things as maintaining several minimum balances, managing multiple accounts and managing checkbooks. But all in all, the benefits of separate accounts for farm and home far outweigh the problems involved.

Balancing the Farm Household Budget

Sometimes expected expenses are greater than expected income. In the short term you may be able to borrow funds to cover the situation. If this approach does not solve your problems, you will need to take a look at some longer term solutions. Two possible long-term solutions are either to increase income or to reduce expenses.

Increasing Farm Family Income

Other than by an increase in agricultural prices or production, additional income may be obtained by sending a worker into the labor force, substituting home production, selling or trading unused or unneeded items, or receiving assistance payments. Older children can look for ways to earn spending money and, in some cases, can supplement family income with their earnings.

Increasingly, one or both farm spouses are participating full or part-time in off-farm employment. In 1986 half of all farm households in the United States depended on off-farm employment for family living expenses. In North Dakota about one-third of the state's farmers work off the farm. Increasingly, those farmers are taking full-time (over 200 days per year) employment to increase family income. When considering employment as a new source of income, you will need to consider the costs involved in working out of the home and off the farm. Extension publication HE256 titled "Working -- Is It Worth It?" is available from your local county extension office and may help you weigh the costs and benefits of employment.

Stressing home production may be an important resource to stretch family income. A family garden can reduce the grocery bill. considerably. Home clothing construction can help with clothing expenses. Handmade gifts for family members are often treasured far more than purchased, mass-produced gifts. The raw materials for home projects combined with the time it takes to make them often costs much less than similar purchased gifts.

Selling unused or unneeded items can also add income. The price of a small advertisement may be all that it takes. In addition, these same items may be traded for more useful items.

Assistance payments such as food stamps, reduced or free school lunches, fuel assistance, and other public and private assistance may be available if income has dropped. Such programs were designed to help those with temporary financial difficulties. For more information, contact your county office of the NDSU Extension Service and ask for publication HE 274, "What to Do When Your Income Drops."

Decreasing Farm Family Expenditures

Reducing expenditures requires that a family decide which planned expenses are necessary for physical and mental health and the safety of the family (essential expenses) and which are nice but not essential for survival (discretionary expenses). Discretionary expenses can be trimmed from the budget. In some cases, priorities might have to be placed even on necessities. Hopefully, your family's goals can help in this process.

Flexible expenses are easier for the household to adjust, but careful monitoring is required before adjustments can be made. In most cases, it is wise to work directly with the creditor to work out an acceptable payment plan before the payment is past due.

Additional Considerations

When making changes in your management of family resources, ask yourself these questions:

Will failure to make certain household improvements result in higher maintenance or operating costs later?

Should household expenditures be financed with credit? And how do consumer credit interest rates compare with farm interest rates? (If you have any questions related to tax management, your best source of information is a tax practitioner who is familiar with your own situation.)

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 nonbusiness 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 taxes and social security taxes. Consider paying them in commodities (livestock, grain, etc.) instead of cash. Spouses can set up their own retirement accounts, too.

A Final Word

A budget cannot perform miracles. It can, however, be an invaluable tool to help you be in charge of your family finances. It can help you to see where you are and help you get to where you want to be in the future.

HE-452, February 1990