Farm household expenses are oftentimes mixed with the farm business. The farm may supply materials or goods that might be used by the household. Conversely, the household often provides many items that may be used in the farm business.
Over 100 years ago, many farm households were receiving their major support by consuming their farm products at home. While this large amount of food and fuel may not be consumed by today’s farm household, separating these expenses can be helpful to understand how much it might cost to live without including the farm expenses in the budget.
This task is important if the farm business is considering a farm transition or succession. The farm business may or may not be able to pay for more than one family’s household expenses. Determining how much will be needed for household costs will help to estimate the income needed.
A farm household’s spending plan is an estimate of how much is needed for farm household expenses. However, this spending plan can be a difficult task to complete if a farmer is not tracking their expenses. Having separate bank accounts for both farm business expenses and family household expenses can make this separation and tracking of costs easier. When it comes to farm versus household accounts, separate checking, savings and other accounts can safeguard business funds from personal ones, allow farms to monitor farm spending more easily and assist with recordkeeping of the farm’s finances.
While tracking expenses may be time-consuming, you can utilize the University of Wisconsin – Extension Monthly and Annual Spending Plan worksheets to assist with this task. The Monthly and Annual Spending Plan worksheets can be used to attribute expenses to the household and the farm business. In a farm succession, these worksheets can be used by both the owner and successor generation.
Household expenses worksheet
The household expenses worksheet reviews the monthly costs related to the farm household and assists in determining what percentage of these costs are being paid by the farm business as compared to family living or non-farm income sources. As the worksheet is completed, think about which expenses may go up or down as the farm business transitions to the next generation.
Spending categories
Housing (mortgage/rent)
- Mortgage or rental payments are examples of fixed payments. This type of expense is not likely to adjust over the year or multiple years. For many farm families, a farm mortgage may encompass the house and farm buildings, farmland, etc.
- Who will be making this loan payment? Are you planning to move off the farm and have a separate mortgage or rental expense?
Insurance (home and auto)
- Property insurance can provide coverage for the structures on the farm along with farm equipment, machinery, livestock and farm products. The farm business may also be paying the insurance premiums for your house and your personal vehicles. Your insurance agent can help with attributing property and auto insurance costs for the household separate from the farm buildings/property.
- Who will pay the insurance premiums on your house and vehicles in the future? Are you planning to move off the farm and require a new insurance policy on this new property?
Utilities (electric/LP/gas/water/sewer/garbage/recycling)
- If you receive a single bill from your electricity, LP, natural gas, water and sewer company or cooperative, you should allocate the expense between your farm business use and the residential use.
- Who will pay for these bills for your home in the future?
Auto maintenance/fees/gas or fuel for auto
- Farmers can either deduct the actual cost of operating a car or truck or deduct the standard mileage rate for each mile of business use from earned farm income. When vehicles are used for both personal and business purposes, you may take deductions only for the percentage of use attributable to the farm business, which requires detailed recordkeeping.
- Who will pay for these bills for your vehicles in the future? Will the farm business own the vehicle? Will you need to purchase a new vehicle?
Health insurance/co-pays (medical, dental, eye, pharmacy)
- Nearly one-third of farmers lack health care benefits, or spouses/significant others may be providing some or all of these benefits. Insurance and health care costs can be high.
- Will these expenses be paid by the farm business? What will be your need for these flexible expenses in the future?
Debt worksheet
The debt worksheet will examine debt payments related to the farm household and assist in determining what percentage of these payments are being paid by the farm business as compared to family living or non-farm income sources.
This section of the worksheet assists in allocating the percentage of the payment that may be farm versus household expense. For example, debt payments may include an auto loan the farm has previously made the full payment on; however, the vehicle is for both farm and personal use. Also list loan payments for a personal residence and other non-farm property, student loans, credit cards and other debt payments.
Total these debt payments to determine annual debt payments. As you complete this worksheet, think about which expenses may go up or down as you transition the farm business to the next generation.
Household net income worksheet
As you consider who’s paying for farm and family household expenses and debt payments, you also need to review your income sources. You may be able to increase income if one of your family members enters the labor force. Substituting home production of goods or services, selling or trading unused or unneeded items, or receiving assistance payments are other ways to increase your income. Assistance payments such as food stamps, reduced or free school lunches, and other public and private assistance exist to help those farm families with temporary financial difficulties.
Additionally, you can ask yourself the following questions.
- Are there Social Security or investment payments you are or will be receiving as additional income streams?
- Are you receiving or going to require a draw from the farm business that would be on a monthly or annual basis?
Compare total monthly and annual spending, debt and income
Finally, you should compare the total monthly and annual family household expenses and debt payments with monthly and annual household income. These worksheets will provide you with estimated family household expenses that will not be paid by the farm and income that may or may not support these expenses. If expenses are greater than your projected income, you can consider either reducing expenses or increasing income. Reducing household expenses may require your family to decide which expenses are essential for their physical and mental health and safety, and which expenses are nice but not essential.
Your next step would be to determine if your income and expenses will be increased or decreased during and after your farm business transition and how this may impact the farm business in the future. Separate accounts will make monitoring farm and household expenses easier. Deciding how income will be divided between farm and family expenses before it is received can reduce conflicts and confusion. Develop a system based on a careful evaluation of expected income and expenses as well as on your goals and priorities.
References omitted but are available upon request by sending an email to the editor.
This article is provided for information purposes only. Readers should consult their own professional advisers for specific advice tailored to their needs. Information contained in this article may be subject to change without notice.
