How high is the hog?
Living expenses for a North American farm family of four run about $40,000 annually – plus $3,600 for each additional family member – notes agricultural economist David Kohl.
"That's an average of almost $3,500 a month," says Kohl, currently special advisor to RBC Royal Bank agriculture. Kohl is on leave from Virginia Tech University in Blacksburg where he is a professor of agricultural finance, and small business management and entrepreneurship. "Depending on personal circumstances, $3,500 a month may or may not be living high off the hog, but it's always worth knowing where those dollars go," he says.
"If a farm family's income from all sources lets them enjoy a certain lifestyle, great," he adds. "But many families – rural and urban – don't budget for living expenses, and that can impose hardship on a farm business if income falls short of personal and business requirements."
That's why Kohl recommends farm families include living expenses in costs of production – so many cents per bushel of grain produced or pounds of livestock sold. "Some recent estimates range from 25¢ to 75¢ per bushel for grain, 5¢ to 8¢ per pound for pork or beef, and $1.70 to $9.65 per hectolitre of milk," he says.
(Living expenses include almost everything except mortgage payments, and include such things as food, clothing, education, recreation, personal insurance, gifts, charitable gifts, furniture and home improvements.)
The "4x4x44 rule" is another reason to budget for living expenses, he adds. Farm managers work long hours for four weeks in the spring seeding crops, four weeks in the fall harvesting crops, and have 44 weeks (the rest of the year) with time on their hands if they aren't raising livestock.
"I realize farm managers invest some of those 44 weeks marketing their production, maintaining machinery, attending meetings and tending to personal and business matters," Kohl says. "But many still have time on their hands. And when people have time on their hands, they tend to spend money one way or another. You've got to budget for a 52-week business year."
Kohl says extension specialists at Texas A&M University hit the nail on the head when they identified four reasons why living expenses sometimes fall through the cracks:
- They are not tax deductible.
- Budgeting can be difficult and time-consuming.
- Living expenses are perceived as insignificant compared to business expenses.
- Off-farm income covers living expenses so there's no reason to budget.
Directing income where it will do the most good is the goal, says Kohl. That's paramount if income falls short of combined personal and business expenses. For families with incomes that exceed expenses, budgeting can build cash reserves to realize more personal and business goals.
"I realize there are tough times in some sectors of the farm economy, but new pickups, household goods and other lifestyle expenditures must be treated as a cost of production," he says. "If you can't really afford them, making do with what you have might be the more prudent business decision. In a global economy that demands being competitive, you can't afford to minimize the impact living expenses have on your business."
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