Calculating Family Living Expenses in Agriculture
Fixed expenses are notoriously difficult to calculate and incorporate into farm budgets. Family living is arguably the most challenging – especially when you consider the emotional component. This post builds on our past work to share new ideas to help you tackle this line item.
Kansas Farm Management Data (KFMA)
Each May, the Kansas Farm Management Association (KFMA) releases a summary of data collected and aggregated across nearly 1,000 farm operations. While these data are helpful in monitoring financial trends, keep in mind that variations should be expected across differing operations, enterprises, and geography.
Figure 1 shows average family living expenses. It’s worth noting that the specific farms included can change over time, so some of the changes in the data are due to different operations comprising the annual average. That said, the data series provide an overall benchmark that shows big-picture trends over time.
Average family living expense was $35,000/year during the early 2000s. Correlating with the farm economy boom, farm living expenses turned higher and peaked at $74,400 in 2014. In recent years, family living retracted and stabilized around $70,000 annually. Total living expense for farm families was $71,900 in 2020, the latest data available.
The annual Kansas data is also broken out into several categories (Figure 2). Creating categories can be subjective, but the data are still insightful. Four categories – food purchased, household operation, personal recreation, and health insurance – account for 57% of total expenses. It’s also worth noting these categories don’t include income taxes on the family living portion of income.
Figure 2 also highlights some of the challenges with reporting the average expense across demographically diverse operations. For example, childcare costs presented an annual average of $288. But it’s very unlikely that any household spent almost $300 on childcare; this data means there were many families who paid zero for the category, while a smaller number faced high childcare expenses. So, the average tells us little about childcare expense, but more about the demographics of the data set (that many don’t have children and/or childcare expense). The point here is to recognize that elements within these categories can vary significantly.
Illinois Farm Business Farm Management (Illinois FBFM)
The Illinois Farm Business Farm Management Association (IL FBFM) compiles comprehensive data from thousands of farmers across the state of Illinois.
Figure 3 shows the annual family living expense in Illinois per the IL FBFM data. In 2019, family living expense was $84,340. Since 2010, this expense has increased at an average annualized rate of 1.4%, slightly slower than the Kansas data.
Figure 4 shows the breakdown of family living expenses in 2019 by category. These data are aggregated into five buckets.
Since 2010, total family living costs in Illinois have increased by $10,131. While not shown, capital expenses decreased (-$1,158) and expendables were up the most (+$7,469). Medical expenses were up $1,938.
Budget vs Actual Expense
Remember, there can be a difference between 1) total family living expense and 2) the amount of family living that is budgeted – or covered – by the farming operation. The key here is untangling the two categories.
A major source of difference between the resources consumed by the family and the resources devoted by the farm is off-farm income. In some cases, the family living line-item of the budget could be negative, representing subsidization by off-farm income or investment in the farming operations.
Considering Data Variables
The Kansas and Illinois data sets aren’t exactly apples-to-apples comparisons, with significant differences in the expenses included (capital expenses) and categories reported. Furthermore, both measures are likely under-representing the full costs as they both didn’t capture the income taxes associated with the family living component of income.
However, considering multiple data sources can help triangulate our thinking. (AEI Premium subscribers, read more about the value of triangulation here.) Furthermore, family living expenses can vary significantly based on 1) family size, and 2) phase of life.
Remember, the goal isn’t to minimize family living expenses, especially in the short run. Some categories of expense – such as retirement, personal savings accounts, health-related savings, college 529 accounts – can help offset future expenses. Efforts to tighten the belt or beat the average in the short run could result in large future expenses without the benefit of force saving (and interest gains).
Wrapping It Up – Family Living Expenses Are Complicated
Perhaps the biggest takeaway from this post is how complicated family living can become and why it’s often on the “too hard” pile, even for us economists.
On an annual basis, changes in family living are very small and nearly unnoticeable. However, over a decade, the changes can be quite significant. For example, the KS data increased at 3.7% since 2000, which doesn’t seem like a lot. However, over two decades, the expense has gone from $35,000 to nearly $72,000.
Looking ahead, the goal for farm managers should be to take the time to 1) understand the current and future family living requirements, 2) budget the farm’s share of those expenses, and 3) balance the current and future needs with farm income generating capacities.