Family Resource Management Field Specialist Women and Money Presented by Joyce Lash Family Resource Management Field Specialist 641-464-5003 lash@iastate.edu The expenses that are traditionally under your control and how they should be factored into the Family Farm Financial Picture Some of the things you should consider when building wealth

Understanding Family Living Costs Integrated into the Farm Spending Plan Realistic Based on actual spending Unique feature of family farming operation is the inclusion of family living expenses into the total picture. Unless a small business owner uses their home and personal assets as collateral to operate a business the two worlds never meet. In farming that is not the case. FSA= no longer request an itemized accounting of family expenses. Lenders take different looks at family living costs. Some will expect them to cover the bare essentials and may even expect part of the off-farm income to be used to pay for operating costs or investments. Most financial lenders use the big picture approach Family Farming Cash Flows and Balance Sheets will include Family Living Expenses. Farming may allow for lower housing costs because the house is part of the farm mortgage payment on the other hand medical costs for privately purchased insurance is one of the highest expenses for farm families and one of the reasons for off-farm employment. Transportation costs for those living in rural areas is higher. Raising your own food????? Needs to be on target. The cash-flow statement submitted to a lender is in trouble if it shows a family can survive on $20,000! Be sure you know what is being written on the line, what is included.

How do you compare? Region 18 2007 - $30,084 State of Iowa 2007 - $34,916 ISU Extension – Economic Profiles Illinois 2007 - $60,294 Minnesota 2008 - $80,728 Nebraska 2008 - $66,126 Ask participants to share what their total family living expenses are or to write it on a piece of paper. These amounts are for a typical family with 3.?? People. The Iowa family living expenses are those reported by farms with annual sales of $100,000 The highest amount reported in Iowa was $47,166 for farms with annual sales of $500,000 or more Illinois figure is increased to $66,412 if capital expenditures are added = personal vehicle, home improvements, etc. A low was stated at $45,517 and a high at $103,668 Minnesota reported their family living costs by areas of the state. This was the lowest figure given with one area reporting family living expenses of $99,366 and another showing $89,147.

Non-Farm Families Iowa 2008 - $48,108 Bureau of Labor Statistics 2009 Midwest $46,551 US Average $49,067 Cedar Rapids area. Housing costs were reported at $800 reducing the figure to $38,448 for a dual income family with two children. Iowa Policy Project Refer to handout with % of spending. 2008 midwest= $47,846 2008 = national $50,486

Budget Suggestions ISU - 10% of farm income be allocated for family living expenses 10-15% of the profit be set aside for non-essential purchases Amount may be 7% if the farm is engaged in high imput production such as operation of a feed lot. Interest on farm purchases is sometimes lower than consumer interest and it is deductible. Can you convince the banker?

Monitor Family Living Costs Record and stay current on expenses Account for cash as well as recorded spending Compare actual costs to projected costs and make adjustments early! Build in cost of replacing major household items Ask about record keeping methods You should be able to produce records and a monthly or yearly summary and comparison is recommended. Lets say you budget $100 a month for clothing but during a recent shopping trip you spent $200 because the price was right and it addressed a need. Then for the next month or next several months you need to reduce the amount spent. At the end of the year extra costs in several categories can make your family living expenses turn out to be a train wreck. If the refrigerator dies in July and it wasn’t factored in then the $1000 spent may raise questions from a lender. Appliances that are more than 10 years old should be replaced. New ones are more energy efficient- cost less to operate

Impact of Inflation In 2008 the cost of goods rose 3.8% Clothing costing $1,200 in 2007 would cost you $1,246 in 2008 In 2009 the cost of goods rose .25% In 2010 the cost of goods rose 1.6% Financial Planners typically use 3.5% to reflect the increase in cost of expenses Family spending is not stagnate. The general price of an item can be more or less over a year’s time. If you are leaving the families living expenses the same for the coming year then you may have to make adjustments in spending to hold the line and end with the same money spent at the end of the year. You would buy one less pairs of shoes or cheaper blue jeans to keep under the budget. The cost of food and energy have been significantly more volatile during the past few years, so much so that the Consumer Price Index now shows inflation with and without these categories.

Wealth Management Balancing Farm Investments with Non-Farm Investments Farm Families in the early years will usually be highly leveraged and have a large amount of debt in land, equipment, livestock. Their main objective is to meet the payments obligations and slowly reduce debt. A major focus of the operation is to expand in agriculture investments –buying more land, replacing old equipment with new, putting up grain storage or farm buildings, buying more livestock. The best financial step to take during this time period is to repay high interest debts and build an emergency account of 3-6 months income. But families should also consider including other forms of non-farm investments to ensure a diversified distribution of assets. The time to start those investments may be when there is off-farm income and access to 401(K) accounts or the first time you hear a farmer state that they need to buy a new piece of equipment before the first of the year to reduce their income taxes! Many investment options will also lower your tax liability and offer less overall risk through diversification.

Organize Your Financial Information Laying the Groundwork Debt Management and Credit Considerations Finding Money to Invest Determine Your Asset Allocation and Risk Tolerance Evaluation Investment Products and Agricultural Oriented Alternatives Evaluating Financial Service Providers and Information Services Investing for Retirement and Estate Planning 11 Supplemental Units http://www.extension.org/pages/Investing_for_Farm_Families http://www.rce.rutgers.edu/money/riskquiz/ http://www.ipers.org/calcs/AssetAllocator.html Lets look at what some of the content in the program will help you to understand.

Asset Allocation

Family Financial Snapshot Farm Assets Personal Assets Crops Livestock Prepaid Expenses Feed on Hand Supplies-Tools Accounts Receivable Machinery Farm Land Buildings and Improvements Contracts and Loans Securities, Certificates Checking Savings Money Market Accounts CD’s Home and Household Items Personal Accounts 401(k) Stocks and Bonds Insurance Jewelry and collectibles Personal Vehicle To determine your current allocation – find the total value, subtract debt. Add together and divide by the individual amounts to determine allocation. Farm may be 75% and Personal may be 25% of your wealth. Are you okay with this amount? Most of the items found on the Farm side are considered high risk investments.

Asset Allocation High Risk Low Risk Checking Savings Crops Livestock Prepaid Expenses Feed on Hand Supplies-Tools Accounts Receivable Machinery Farm Land Buildings and Improvements Contracts and Loans Securities, Certificates Home and Household Items Personal Accounts 401(k) Stocks and Bonds Jewelry and collectibles Personal Vehicle Checking Savings Money Market Accounts CD’s Insurance So are some of the items that you consider personal. If your retirement account at work has a high allocation to stocks it also would be high risk. A general guide is to subtract your age from 100 for the amount of high risk assets that you hold. But that guideline is for individuals who plan to retire at age 66 and most farmers don’t. All of those elements should be considered by farm families as they determine their investments. Land values have historically had the same rate of return as stocks, but are also just as volatile. At some point you should reduce the overall family risk by adding more to the low risk side of the equation because you have some of the more conservative investments available.

The Three Legged Stool Social Security is projected to cover approximately 60% of your income needs Farm Income? Retirement Accounts Social Security—need 40 quarters and 35 years are included in the calculation. Each year you contribute more you erase a year of 0 or low income. Men typically miss 1.6 years of employment. Women 14.7 3 options to increase benefits –Borrow and invest, claim and suspend, claim now and claim more later Full retirement age you have no limitations on what you can earn.

Retirement Accounts Work -401(k) or Pension Simple, Keogh, SEP Traditional IRA or Roth IRA Annuities CD’s Money Market Account Keogh—20% of earned income must cover all employees fiduciary responsibilities SEP Simplified Employee Plan operates like a IRA SIMPLE Employer/Employee contributions Employer provides 3% match or flat 2% contribution maximum amounts are set

Credit Reports Check annually www.annualcreditreport.com Monitor and make corrections Experian, TransUnion, and Equifax

Questions/ Thoughts

Family Resource Management Women and Money Thanks You! Joyce Lash Family Resource Management lash@iastate.edu 641-464-5003