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How to Determine a Level of Spendable Income

 
  From the June 25, 2018 Issue of Agri-News
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 What level of spendable income do you want or need from your farm operation? Dean Dyck, farm business management specialist from the Alberta Ag-Info Centre, examines what to consider when determining it.

One of the least understood and measured cost in a farm operation’s cash flow is the amount the owners withdraw from net farm income for family living. “Many people remember a time when farm operations penciled in $30,000 to $40,000 annually,” says Dyck. “Today, farm families enjoy the same standard of living as their urban counterparts. Higher withdrawals for family living use “after tax” dollars can impact the farm operation’s ability to grow, pay down debt, and invest outside the farm.”

Statistics Canada data from 2016 shows the total expenditures for an average Alberta household of $106,514 with total current consumption of $74,044 before income taxes. Explains Dyck, “Statistics Canada does not break down urban versus rural expenditures. Generally, household expenses in rural Alberta are approximately 80 per cent of the Alberta household data. It works out to $59,235 per year, which may seem high for the average farm family. However, some expenditures such as shelter, household operation, and transportation blur between farm expenses and personal expenses.”

“Since family living expenses are paid with “after tax” dollars,” says Dyck, “It is necessary to calculate the amount of additional taxable income the farm must generate to pay for living. Using a combined federal and provincial tax rate of 25 per cent, an average farm must generate approximately $74,000 over and above income used to pay for farm expenses per year.”

Can an average farm in Alberta generate enough income to pay for these expenditures? Says Dyck, “In 2016, the average Alberta net farm income was $56,633. The deficit of approximately $17,000 shows a high reliance of farm families on off-farm income to provide a higher standard of living, to manage volatility in farm income, and to provide funds for investment back into the farm. In fact, a 2017 study found that off-farm jobs in Alberta contributed to 79 per cent of household incomes.”

Dyck adds that in a practical world, family living expenses vary widely from the so-called average. “A strategy for success is to use these numbers as a benchmark and develop a cash flow for personal and family expenses. There are many templates on the internet to help with the process.”

One tip, says Dyck, “Is to add 25 per cent to your family budget for unexpected expenditures. Also, give some thought to adding an expense line for off-farm investments for retirement. Farmers tend to view their equity in the farm operation as their source of retirement income. With people living longer, diversification to non-farm investments will provide flexibility with future income flows and flexibility in succession planning of the farm business.”

“It is important to know your personal needs and how you will generate enough income to fill those needs,” adds Dyck. “This knowledge will also manage your wants. Often, those wants get farm families into trouble. A family farm creates self-employment, so managing the income to meet the needs of the farm and the needs of the family is hard to separate. It is always important to consider and a challenge to manage.”

For more information, see Off-Farm Income in Alberta or Statistics Canada’s Survey of Household Spending.

Contact:
Alberta Ag-Info Centre
310-FARM (3276)

 
 
 
 
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For more information about the content of this document, contact Dean Dyck.
This document is maintained by Stephanie Irvine.
This information published to the web on June 18, 2018.