A family’s living expenses is a topic many lenders discuss with borrowers. This is a cost that few track closely.
Borrowers’ numbers often differ greatly from actual costs because many define these expenses differently. For example, are income taxes part of family withdrawals?
The value for family living expenses can be detailed in several ways. A recordkeeping system with a chart of accounts that lists what is included in the total is a good start.
Having a “family living” bank account that gets funded with transfers from the business is another way. Or lenders may simply take all the deposits, subtract farm expenses and assume the difference is family living.
How do farmers’ family living expenses compare to nonfarmers’? For a family of four in Ankeny, Iowa, LivingCost.org estimates the cost of living is $4,163 per month:
- $1,591, rent and utilities
- $1,469, food
- $118, transportation
- $985, other essentials
Farmers often have part of the housing included as a farm expense. The Economic Policy Institute gives family budget expenses for every county in the nation based on household size.
To see how your expenses compare to others, Iowa State University Extension offers the “Farm Family Living Benchmarking” spreadsheet. It uses data from the Finbin program at the University of Minnesota.
UMN also offers articles on financial management.
And Purdue offers “Taking Control of Farm-Family Living Expenses.”
Illinois farmers
Farmdoc at the University of Illinois offers information on farm family living expenses in the state for 2021-24 by categories.
It shows average family living costs of $96,000 but then adds on capital purchases of $6,500, putting the cost over $100,000 before income taxes.
Income taxes and Social Security taxes for the last three years in Illinois averaged over $37,000. Medical costs varied widely but averaged $11,447.
The site also shows the high and low third of farms in the data set. The high averaged over $175,000, and the low averaged under $70,000. When averaged over the number of crop acres or livestock income per head, it’s a challenging number for most. Off-farm income is often a major contributor to meeting living expenses.
The goal shouldn’t be to reduce the quality of family living, but to see where the money is going, what is under your control and what adjustments might be made to manage reduced income.
Farm income is highly variable from year to year, but many living expenses are not. By reviewing living expenses before meeting with a lender, you will be better prepared to respond to comments about reducing these costs.
You may be spending more than you realize, and by talking with your family, everyone can have input on how to address the concerns.
Talking about money
Iowa State Extension’s “Managing Farm Family Finances” offers an outline to discuss living expenses. Because adding off-farm income also includes costs, it is useful to evaluate how much off-farm income might be needed to offset family living expenses.
With higher costs for so much, it’s hard to reduce or even hold living costs level. Discretionary items like recreation can be reduced or eliminated, and certain discretionary business expenses can also be cut.
In the end, turning off more lights isn’t going to offset a $100,000 shortfall in your cash flow. Some will need to restructure debt by “moving it down the balance sheet” or strategically selling assets to get the cash flow to work.