In a past article I addressed the reasoning behind accumulating a Cost of Production Cash Reserve when income is positive to assist with managing farm expenses during economic downturns. The same need for a cash reserve exists to manage the 800 pound gorilla that lives with every farm family. That 800 pound gorilla is Family Living Expenses, which all too often sneaks up and lays the family low during times of farm financial distress. The question to be addressed is, “What will you do if farm income declines for several months?”
Farm families have not historically managed family living expenses in the same manner as a wage earner. The farm often is the source of income, a lifestyle, a home, and a part of the family ethos, so the pot of money blends together blurring farm operating expenses and family living expenses. However, just like there is a great need in agriculture to institute enterprise accounting, i.e. keeping records of each enterprise on the farm (milking cows, heifers, corn, hay, beef herd, etc.) so you can actually determine the profitable enterprise and the money loser, family living expenses need to be tracked so they can be managed. Financial distress creates havoc with the management of the farm and it can also create stress and havoc within the family. The family becomes so focused in trying to keep the farm afloat they may not manage the financial stress that wears down even the strongest families. Separating farm and family accounts and savings allows the money manager time to make decisions rather than just reacting to the situation.
The first step is to determine your necessary family living expenses. Some Mid-West surveys show that Family Living Expense for a farm family of four is well over $50,000 per year. Tracking family living expenses and developing a budget requires effort to get it right rather than a close-enough guess. Start with determining exactly what comprises your family living expenses and the amount of money you spend on each category: food, medical, charity, education, recreation, etc. What do you spend for food? This includes not only the grocery store but restaurants and even milk from the bulk tank or a slaughtered beef because it has a value to you. It may not be the same as the grocery store price but the cost of raising and processing the foodstuff needs to be counted since without the benefit of the farm you would have to pay for it. Your home may be part of the farm but it has a value, whether it is fair-market rental or the value of taxes, insurance, upkeep, utilities, etc.
The next step is to determine how much money you need in a reserve. It is important to note that consumption, i.e. what you have been spending, may not be necessary living expenses. But if you have developed an accurate budget you can then pare the amount down to the essentials necessary to keep the family functioning at a level of your choosing. Then you decide how large of a cushion to accumulate. In the non-farm community past recommendations have been that that families accumulate a reserve equal to 3-6 months of living expenses. With the length of this downturn it may be wise to move that to a 6-12 month reserve.
The last steps are where to park the money and when to use the money in the Family Reserve Account. This is not a bank account to fund the farm during hard times because you addressed that issue with the COP Cash Reserve and it is not a vacation account. It has a specific purpose of sitting in a safe and reasonably accessible account until the farm can no longer pay a living wage for some period of time.
Of course in reality, it is impossible to start squirreling money away for the farm or family until profitability returns. But it is not too early to plan for future profitability. Without a plan it is amazing how money tends to “slip” away whether for new equipment, expansion, paying off debts or living expenses. All may be valid and needed but an orderly, thought out process is required to insure your goals are met. During the planning stage you will want to decide the trigger for using these funds just like you should determine what triggers the use of the farm cash reserve. A last point is to realize that accumulating cash reserves is a methodical process that requires time.
Virginia Cooperative Extension materials are available for public use, re-print, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.
Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Alan L. Grant, Dean, College of Agriculture and Life Sciences; Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; Jewel E. Hairston, Administrator, 1890 Extension Program, Virginia State, Petersburg.
February 8, 2010