Farm Management Minute: Do farmers need an allowance?
It was not that long ago when money was so tight that South Dakota farmers did not always know where money for groceries or Christmas presents for their children would come from. However recently, things appear to have changed and this has been less of a concern. The prosperity in ag has produced both an increase in the cost of living as well as the standard of living for ag and non-ag producers alike. This success, along with the fact that everything related to agriculture has gotten bigger, has made it difficult for producers not to get desensitized by the massive numbers. Because of this, some producers may have found it easy to lose track of family spending.
According to 2013 data compiled by the South Dakota Center for Farm/Ranch Management at Mitchell Technical Institute, the average farm family in South Dakota had family living expenses of $70,094, a 9% increase from 2012. This amount includes things such as food, medical care, health insurance, education, home expense, recreation, and life insurance. When other non-farm expenditures such as vehicle and real estate purchases and income tax are included, the total comes to $87,246.
What is concerning about these numbers is that they have been steadily on the rise since 2007 when the family living expenses for the average family were less than $50,000. What is more concerning is that family living expenses in 2013 showed a 9% increase in a year when there a 40% decline in average net farm income. Off farm income of $19,512 also showed a slight decrease when compared to the 2012 amount of $20,866.
Just as we do for participants in our program, we encourage all producers to have a budget and track their family living expenses just as they should their farm expenses. There are two simple things that can be done to help do this. First, I encourage farmers to have two separate checking accounts; one for the farm and one for non-farm or family living. Any off-farm income would go into the non-farm account. The second step, if the off-farm income does not cover all family living expenses, set up a monthly draw or “allowance” to be transferred from the farm account to the personal account which should cover these expenses. This may seem excessive; however, it may be necessary to create the discipline needed and creates an alternative to continuing to write checks on an essentially limitless account, assuming your operating line is tied to the farm account.
This concept cannot be stressed enough, especially as we appear to be entering leaner times in agriculture with commodity prices trending down from previous highs. Farmers need to remember that family living expenses come from post-tax money, just like land and other non-farm capital purchases and payments do. If you would like to speak with one of our instructors on how to better budget and manage your family living expenses, please contact the South Dakota Center for Farm/Ranch Management at 605-995-3098 or firstname.lastname@example.org.