Managing farm finances

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by Deborah Jeanne Sergeant

Effectively managing the farm family’s finances can make the difference between a farm succeeding or folding. MidAtlantic Women in Agriculture recently presented “Managing Farm Family Finances” with presenters Maria Pippidis and Jesse Ketterman, both Extension educators. Pippidis is with the University of Delaware and Ketterman is with the University of Maryland.

“We’re not born with financial skills,” Pippidis said. “They have to be learned and practiced. The more people involved in the farm to make decisions, the better it is, but that can be not so easy. Financial education is important to practice and learn … The other thing I’ve learned over time is there is no right or wrong way.”

She said success relies upon having the family on the same page regarding the budget, savings and debt.

“What’s coming in is supposed to add up to spending, savings and debt,” Pippidis said. “The math part is the easy part. It either adds up or doesn’t add up. The problem is everyone’s life situation and perspective and what they value and beliefs about money is a little different and how we communicate about money is a little different.”

For many reasons, farm families’ finances can be even trickier, including the farm’s financial structure. It can impact what’s happening on the family side, Pippidis said. “Sometimes there are competing goals with what is happening with the family and what is happening with the farm enterprise.” There may be fluctuating farm income and expenses that can affect the family. There may be competing needs and goals for the farm and family. This may require off-farm income to help the family and the farm succeed, or engaging in multiple revenue-making enterprises on the farm.

Resilience Vs. Resiliency

Pippidis defines “resilience” as the current capital or resources drawn upon to address change and stressful situations. “Resiliency” is the processes that contribute to building resilience. Developing both are vital to farm success.

Characteristics for both include being adaptable, hopeful, robust, flexible, communicative, interested in learning to improve oneself and others, social/interactive, prepared, having reserves, diversity, being able to bounce back or even go forward, Pippidis said.

She views the family budget as an important tool for reaching family and farm business goals. A family budget can also identify budget leaks, understand actual costs and plan for financial irregularity, debt reduction, retirement and children’s education. Irregularity can include seasonal income or farm income affected by price fluctuations.

Looking into the future can also help farm families adjust their present-day budget to help achieve their goals. “Create a picture in your head of where you want to be in two to three years,” Pippidis said. “Use this picture to help you stay on track and stay motivated.”

For some people, looking ahead further may be more helpful. Goals should start with solvency – paying the bills – and continue with building an emergency fund, using credit wisely, obtaining insurance and other risk mitigators, homeownership, investment planning and estate planning. Farm goals could include new equipment, more land or the ability to implement a new idea.

“The advantage of goal setting is it helps you make tough decisions,” Pippidis said. “If I have many different options and limited income, goals help set those priorities.”

She’s a fan of setting SMART (specific, measurable, achievable, realistic, timely) goals. She offered a SMART money tool at tinyurl.com/SMARTmoneytool. The process begins with clearly identifying and writing down goals, pricing the goals, setting specific dates, developing plans for achieving the goal and beginning working on it.

Setting Up a Spending Plan

Ketterman spoke about developing a spending plan. The first step is to identify streams of income.

“Where is our income coming from – farm income, off-farm income, government benefits you may receive?” he asked. “Then you need to work on the expenses.” There are monthly expenses and periodic expenses. Once you have income and expenses, you may have everything you need, but you need to make sure your goals are incorporated as well.

It’s also vital to list debt. “If you have all this in a spreadsheet, people a lot of times don’t incorporate their goals,” Ketterman said. “They may also have to refine it month to month as their expenses change.”

Developing a spending plan can help show money coming in versus money going out. Ketterman also encourages farmers to look for “spending leaks,” which is money spent with little thought given to it.

“Food away from home is a spending leak,” he said. “People don’t track how often they’re eating out and they could save a lot of money buying groceries. Tobacco and alcohol lead to an interesting discussion. I don’t care if someone uses tobacco or alcohol but it plays a role in the family budget. If a lot of money is going into those areas, it could be a spending leak.”

He encouraged growers to incorporate their goals into their spending plan and to bring in at least a little more income than their expenses. Income sources could include wages, pension, Medicare, personal supports, rental income, Social Security, assistance programs such as WIC, investment income, tax refunds or credits, yard sales, freelance work and child support/alimony. He offered an online tool to help set and reach money goals at tinyurl.com/IncreasingIncome.

Ketterman also noted an online tool for cutting expenses at tinyurl.com/CuttingExpensesTool.

He recommended prioritizing spending and incorporating savings as a fixed expense – at least 10% per month.

“It’s interesting because when I talk finances with different age groups, I have the same conversation: needs versus wants,” he said. “Prioritizing affects you throughout your entire life. Savings need to be part of your fixed expenses.”

It’s also important to list debt: where it’s owed, the balance and the monthly payments. Ketterman mentioned powerpay.org to set up a payment schedule based on the fastest, cheapest way to pay down debt.

“Most people have heard about the debt snowball method,” he said. “If you have five different types of debt and one is $30 a month and the most expensive is $500, this approach is to focus on getting the $30 a month paid off. Instead of $30, pay $50. When that is paid off, you move up to the next biggest and take the $50 and put it towards the next one. Focus on getting out of debt. You’ll have a lot more freedom. You have to reduce the money going out or increase the money going in or both. You’re trying to make small changes; it doesn’t take a radical step to make a difference in balancing your budget.”

A little psychology can help weigh whether a purchase is worthwhile or not. “Figure out how much you really make per hour and then apply that amount to everything you buy,” he said. “Ask yourself ‘Is this worth so many hours of my life?’”

For others, tracking purchases in a record book, through a computer program or via an app is more helpful. Some use no cash so they can more readily tell where their money goes because debit and credit card purchases are all recorded.

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