Rules of the Road for Driving Your Business and Personal Finances
July 3, 2014
The Corvette Rule
Over the years, farm family living costs have been some of the most vague cash flow numbers in both personal and business finance. Recent years have seen profits and prosperity in many agricultural sectors enhancing agriculture income statements and balance sheets. A residual effect has been increasing family living costs as families enjoy the fruits of their labor. Many of the state and commercial farm record summaries analyzed have found living costs in the $70,000 to $90,000 range, with one state above $100,000 per family. One farm record system isolated grain producers and discovered the family living costs exceeded $200,000 for 20 percent of the grain farms in their database.
So, what is the Corvette rule? What does a fancy sports car have to do with family living costs on the farm? Travel with me back in time to 1967 in the days of the Beach Boys, Rolling Stones, Beatles, Bob Gibson – the baseball pitcher, and the famous Chicago Bears linebacker – Dick Butkus. A shiny new red Corvette ranged in price from $4,495 to $4,895 for the big block 427 super power roadster. According to the farm record data from Cornell University at that time, farm family living cost was approximately $4,000 annually. Fast-forward to 1985 – the height of the farm financial crisis when the stock market was booming and the Chicago Bears’ football defense featured Mike Ditka as coach and Walter Payton as running back. Farm family living cost was $20,000 on average and a new Corvette was $22,000. Today’s fiftieth anniversary Corvette with a top end of 202 mph – loaded with accessories – comes in at $78,000 and is parallel with the farm family living cost range of $70,000 to $90,000.
Average Does Not Live Here
Now, in the practical world, a wide variation in family living expenses is observed. In some farm record systems there is up to a $60,000 annual difference between the bottom one-third and the top one-third of farm living expenses. For young producers, living modestly is one way to gain a competitive edge because family financial withdrawals can impact business growth and investment strategies.
A rule of the road in developing your living expense budget is to calculate it on a monthly basis and then add 25 percent for unexpected expenses. If your “other” and “miscellaneous” categories of expenses are more than 10 percent of the budget, scrub your budget and add more detailed categories.
Another subset of family living cost and cash flow drains can be non-farm capital expenditures, which could be real estate. Everyone needs a killer toy to “smell the roses” a bit, but keep expenditures on these items within reason. Corn prices at $7.00 per bushel have resulted in some $100,000 log ice fishing houses with saunas, hot tubs, and satellite TV. Lake houses, exotic vacations, helicopters, and even a vintage 1967 Corvette – if you are not careful – can be drains on cash flow.
The Tax Man Cometh
Section 179 depreciation revisions and increased local, state, federal, and real estate taxes will be added drains on cash flow. While tax strategy is a high priority for most businesses, the old adage “you don’t go broke paying income taxes” is definitely a rule of the road. It is critical to balance tax reduction strategy and investments in machinery and equipment which then can impact overhead cost. Deferred taxes are a tsunami in the liability section on the balance sheets of many producers who have tried to minimize taxes throughout the years.
Investment Outside the Business
Concerning children and grandchildren’s education, make sure they contribute up to 50 percent of the cost of higher education as a rule of the road. They will become more engaged and focused on their studies when they have some “skin in the game.” Invest 5 percent of your net income outside the business. A seminar I attended in Canada really put this into perspective. The facilitator asked the audience, “Would you invest everything you have in one stock or bond?” The producers in the audience shook their heads “no” and then the light came on for them regarding the diversification angle. Yes, tax savings that one can receive by investing in nonfarm investments such as an IRA, SEP, or 401(k) retirement plan can be a tool to ensure that the business’ investments are not all eggs in one basket. The final rule of the road is to accumulate 50 percent of your retirement cash flow needs thru investments outside the sale or lease of the farm assets. This provides diversification of income flows and flexibility in the transition of the business.
Hopefully, these general rules can keep you between the lines in the financial journey down the road of business, personal, and life balance.