How Family Living Expenses Effect the Farm Loan Process

Financial metrics are commonly evaluated during the farm loan process. Often times, cash flow and debt to asset is far easier to explain than family living expenses. Questions regarding what needs to be estimated, or even what exactly family living cost is arise.

Family living is exactly that, items that are included in the basic family budget: housing, food, childcare, transportation, health care, other necessities, and taxes. From a financial standpoint, why are these items tracked?  It all comes down to cash flow. 

In short, ag lending is not the same as consumer lending.  Often, the farm is the main or only source of income; and that income is needed to cover living costs in addition to any debt.  To accurately calculate cash flow available to service debt, family living expenses need to be included. 

Historically, the average family living expense was $35,000 annually per household.  This number was often used leading up to the agriculture super cycle in 2014 and then dramatically increased as commodity prices increased.  Today, the average family living expense is estimated at $80,000 annually per household.  That’s over double what was calculated prior to 2014. 

Unfortunately, tracking family living can be a daunting task.  Even for non-farm families, budget and tracking household expenses can be a tall chore to manage.  It is hard to track expenses, calculate and keep up with multiple spenders in the household.  Yet, there are some things that you can implement that may make it more manageable. 

It is easiest to begin tracking monthly re-occurring expenses to establish a baseline.  From there, knowing your needs both short- and long-term will help you gather the remaining items needed to fully budget the necessary expenses.  Hopefully, there will be some excess funds that you can begin to ear tag for wants. 

Aside from knowing expenses for both needs and wants, the same rings true for knowing your income sources.  If the farm is the only income source, take a hard look at historical income and determine if there are ways to improve the bottom line.  Maximizing margin will play a critical role in servicing family living, as it can provide additional income for those needs and wants. 

Estimate and track expenses by using a tracking tool.  You may use an excel document, an app or even a more traditional method of pen and paper.  There are many ways to track expenses, pick one that is the easiest to use for you.  Whichever method you use, consider the following example from Purdue University.

Example: Farm Family Expenses Worksheet:

The above break down provides examples of buckets for the various family living categories. From here, each family can tailor the categories to meet their own unique needs/wants.  The main goal is to have some way to track the living expenses of the household.

Dr. David Kohl summarized family living as this, “Living costs are like concrete – once it sets up, then it’s difficult to change.”  This encapsulates the importance of tracking family living, through budgeting and revisiting that budget.  To just spend and not really understand how that impacts your bottom line can lead to living habits which are hard to break.  Taking time to examine your family’s needs, and pivoting when needed, can provide agility and the ability to make proactive decisions.   

If you are considering buying or selling land or refinancing to improve your farm’s overall financial footing or as part of an overall growth strategy, Conterra can help you make sound, well-informed decisions. Jackie Mosier works with Conterra borrowers in the Great Lakes Region. Reach out to Jackie or any of the Conterra relationship managers today to begin your farmland financing conversation. 

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