The cattle market is very nice right now. Our July local sale in Virginia is usually one of our less-populated sales, yet over $1.5 million of calves left for their new homes this week. Steers averaged over $1,775 each, and heifers brought nearly $1,515 on average.
With those kinds of prices, it would be easy to start to dream of some items that would make life easier on the farm. Maybe a new truck or a new tractor would be a nice way to spend some of that newly acquired farm funding.
No one deserves a few nice things more than our hard-working farm families, and there can come a time when replacing an old clunker with a new piece of machinery makes sense; however, it is also true that caution needs to be exercised before emptying the piggy bank.
There really isn’t a gentle way to say it, but many truths in life sting a little bit, and the hurt doesn’t make them any less true. The truth is, “Good times can hide poor management.” It may be a while before I get one of these calls (and I would like to think that I might never have to field such a call again), but the call I dread the most comes when the financial clouds are dark.
“Andy? What am I going to do?” That question is gut-wrenching because I know how totally paralyzing that situation can be. Farming takes its toll on the best of days, but when the challenges of daily chores meet a financial hardship along the way, the waves are crashing over the boat in short order.
I often ask young audiences and farmers alike, “What is the easiest problem to solve?” The answer might seem a bit glib, but it's true that the easiest problem to solve is “the one you avoid.” Successes can be hard to duplicate, but mistakes are highly repeatable.
Everyone makes mistakes, and the person who is afraid of making mistakes likely is missing out on opportunities; however, the person who learns from mistakes and learns from others to avoid mistakes is at least 28% ahead of the game financially.
Why? If you make a poor business decision, there is usually some monetary loss associated with that decision. The only way to reset the financial table is to earn that money back somehow. The issue is that generating income also means generating tax responsibilities, and on average for every dollar earned, you’ll pay about 28% in taxes in some form or fashion.
If you avoid a mistake that would have cost you a dollar, you actually saved $1.28 because you didn’t have to earn that dollar again to replace the one you lost in the bad decision. As a friend once said about having a healthy bank account, “Having plenty of money is like a race car. The faster you go, the easier it is to go faster.”
Another consideration on spending, particularly spending on your farm or business, is today’s higher interest rates. Most people think of higher interest as being bad because the payments are higher. Higher interest rates also make the “benefit of doing nothing” higher. Let me explain.
You might be tempted to spend some money to buy a new piece of machinery. To make the math easy, let’s say the machine cost $100,000 and you had the cash to spend on it without making a payment (unlikely … but OK). Let’s also say that you bought the machine to make an extra $3,500 per year after everything (fuel, maintenance, etc.) was paid.
If the interest the bank would pay you had you just put the original $100K in the bank is only 0.5%, you made a good decision because you would have only gotten $500 in interest. However, if you could get 5% interest on a CD, you lost $1,500 because you could have put that money in the bank and it would have earned $5,000 without you doing the first thing. Plus, you still have the original $100,000.
In this case, the smart money would be to do nothing. Put it in the bank and let the money work, not you.
Not to sound like an old curmudgeon, but one thing I have noticed about some younger colleagues is that they fail to recognize the effects of higher interest rates. They are intelligent people, but frankly, they are too young to recall the double-digit interest rates of the late 1970s and early '80s.
In 1981, mortgage rates in the U.S. topped 16%. I really don’t think we will see that kind of spike again any time soon, but that was definitely a time to have money in CDs or savings accounts.
The “Rule of 72” is a quick way to think about savings interest rates. If you divide 72 by the rate your deposits are earning, that is the length of time required to double your money. At the level of interest in 1981, your money doubled every 4.5 years.
In contrast, just a few years ago, you would have to have nearly $1.8 million in CDs for the income generated to keep a retiree above the federal poverty level. Half a percent interest required a wait of 144 years for a retiree’s money to double.
I graduated from high school in 1981, and it is hard to think about that being 42 years ago, so I can also understand why younger adults struggle with transitioning to saving versus borrowing.
Money in the bank is like having a cow-calf operation. The more cows you have, generally the more calves you have to sell, and the higher your income is from that “calf crop.” Depleting your savings now is like selling your cows off. It is difficult to sell calves if you have no cows.
Building equity and paying bills isn’t very exciting, but it is the basis for being a sound manager and a good decision-maker. Use these good times to save for a rainy day; no matter how dry it seems to be, rain is bound to come.
