More specifically, how do I budget for a business that is VERY cyclical? If you haven't read my blog at all, you might not know...so first some background.
I'm 29, work as a software engineer at an airplane company, and live a very comfortable life at this salary. I think I've made smart money choices (except that darn NEW pickup I bought 4 years ago and have 2 years left to pay on it. Oh, and it already has 104,000 miles on it. Grrrr, darn ex-boyfriend that convinced me to buy it.) Over the past 6 years I've bought a house and sold it for a $15,000 profit, bought another house that I owe ~$70,000 on, (it is worth ~$90,000), I have ~$125,000 invested in 401(k)'s, IRA's, Roth IRA's and taxable accounts. I own ~80 cows in a partnership where I don't have to do any work on them but get 1/3 of the money from selling the calves (My dad - my business partner - gets 2/3 of that money for doing all the work). The cows are worth about $60,000 + probably $20,000 for my share of the calves about ready to be sold at the beginning of January. I was maxing out my 401(K) and maxing out a Roth IRA every year, plus investing in the taxable mutual fund around $50 every month. I've got a very workable budget for a steady income and steady expenses.
I am getting married to a farmer. Right now, at least before we were engaged, he was more of a "farm hand" than a farmer because even though he had 80 acres of farm ground he was buying, most of the work he did was for other people. He got paid from the guy he worked for, traded some welding and other work for another guy, and gave his labor away to his dad (that is another story).
When we got engaged, we decided that we wanted him to continue to farm and me to continue to work as a software engineer, at least until the 2.5 hour commute did me in and/or we had some kids. My off-the-farm job would be a HUGE help to getting going on farming for us instead of him killing himself for someone else. We decided I would only invest 4% in my 401(k), which is the company match, and take the difference and put it in a high-yield savings account (getting 6% interest) until we could save up enough to buy some land.
We decided that we wanted to get bigger in cattle instead of farming right now, and that would be our focus.
The first thing we did was invest in a tractor and baler. We got a loan from the bank, $12,500, over 3 years at 8.75% interest. About $5000 every year for 3 years in payments. I financed that through my bank, in my name, and the tractor/baler belongs to me (until we get married...then all of it belongs to both of us), because I am in a higher tax bracket than he is. Next year that won't matter, but this year it does. I can write that investment and all the expenses off associated with this endeavor off. He swathed and baled a lot of feed, prairie hay, and brome grass this summer; some of it I will get paid for and some of it I will get shares of the crop to feed my cattle. For this year, he is my employee. He kept track of hours he worked and money he spent on fuel, parts, etc., and I paid him an hourly wage of what he was getting paid by the other guy and reimbursed him for what he spent. I've spent about $4200 in parts and labor so far this year. Because we bought this so late in the season, we won't make that back this year, but we should make that back plus what we owe next November on the loan by the end of next summer.
Next, he had people asking him to cut sunflowers, soybeans and milo, but he didn't have a row head for his combine. (don't ask...just a special piece of equipment you need to cut sunflowers, soybeans, and sometimes milo). He found one for $800, and the first guy he cut for is going to pay around $850 for cutting his crops, so we bought that too. This deal was a little different than the baling business...I just floated him the $800 so he could buy it, and he is getting paid for all the work he does for the other farmers. He owns the combine already, so I couldn't come up with a fair way to determine how much of the paycheck the row head vs. the combine was worth, and there is not much depreciation in $800, so not worth the effort of figuring that out. He'll pay me back when he gets paid from them.
Finally, we were able to find enough winter grazing and summer pasture to take over 36 head of my cows from my dad. This way, we can keep all of the money from selling the calves instead of only getting 1/3. But, we took over the cows in November/December of this year, and they won't have their calves until Feb-April. We will grow em up and then sell them January 2009. Lots of expenses here...we had to buy fencing material, we have to pay rent on the winter and summer grazing, we have to buy mineral and other supplements to help them get through the winter. We are going to buy panels in case one of them has trouble calving, so he can get them in and help them (soooo worth it. If we save just 5 calves because of this, it will pay for itself. This is something that will last 20 years or more). We are going to by a hay feeder and a wagon so we can feed them during the winter. I'm going to guess $8500 this winter/early spring in expenses, plus his salary until we are married. These are all start up expenses...the expenses next year and after won't be as much.
Lots of expenses at the start up, but great potential down the road. He is really good at finding good deals, making due with old equipment, fixing things if they break, fabricating things instead of buying them (if he has time), etc. He has also been very good at explaining what we need, what his goals are, big expenses coming up, etc. I've really been hammering hard that if we NEED to buy something that will make us money in the end, then let's buy it. But if we don't NEED it, then we won't buy it. And he agrees with that.
Apparently, I'm good at writing checks, cause I've done A LOT of that lately 
.
I am going to be the accountant for our household and the farm. I can figure out the household stuff, as I've done that for myself for a long time, and we'll just need to compromise (as all married couples do) on that money.
But, how do we budget for the farm? My job will pay steady, but unless my boss lets me telecommute some, I will have the same expenses I have now. If I get rid of all the wedding expenses I'm paying for now, I'll free up some money to pay the bills at the other house (yes, at first, we will have two houses, one by where I work and the other by where he works).
I can see big chunks of farm income coming in when we sell calves in January, get paid for baling either when the people we bale for sell their calves or sell their wheat, when we sell wheat in July, and for custom harvesting in July and September. I've always been one to keep just enough on hand to pay my bills and send all extra money to loans to get them paid off and not pay so much interest. I had a $3000 emergency fund, but with the above expenses, I drained that plus cut into some other money I had set aside for other things.
How much should I save up? Should I have a goal of trying to figure up what the expenses will be for 6 months (both the household expenses and the farm expenses) and save that, and then put extra money towards loans? Or consider the household expenses as being paid for out of a salary and just try to save up for the next 6 months of farm expenses? I guess I'm asking, how do I switch from thinking "I'll get paid in two weeks (or less)" to "we'll get paid for this 6 months from now"? And how do I plan for things like that?
How do I budget?
December 6th, 2007 at 05:43 am
December 6th, 2007 at 03:57 pm 1196956659
I hope Ima_saver will chime in on your post, because I think she is the one on this board with the most experience being in a similar situation as you. I also am in a similar situation, but not for as long as Ima_saver.
Here are a couple of my posts that may be of interest to you:
http://scfr.savingadvice.com/2007/04/20/how-to-prepare-financially-to-start-your_25124/
http://scfr.savingadvice.com/2007/06/16/making-hay-some-thoughts-on-risk-and-pre_27307/
So, to answer your questions, here is my advice:
1. Yes, absolutely save up AT LEAST 6 months of expenses, and preferably even more if you eventually can. I like to have a year's worth of savings for our expenses both household and business, plus a bit extra "just in case." The standard rules of thumb about how much of an emergency fund to have do not apply when you are an entrepreneur in a cyclical business.
2. Continue to question each and every farm purchase. You will want to grow your business and take risks, but do not try to grow so quickly that you become weighted down with debt. Each step of the way, ask yourselves what the worst case scenario would be and if you are prepared to deal with that and if the risk is worth taking. If the answer is yes, then by all means go for it! Could you wait to buy any more equipment until the current loans are paid off and you could pay cash, or would that put too much of a crimp on growth?
3. Are you still contributing to the taxable mutual fund each month? If so, IMHO that money would be better spent going to the business. [But continue making your tax-deferred contributions, at least up to your employer's match.]
4. Sounds like you already know this, but since you already have a comfortable life, any extra money you make during peak seasons is better off going right back in to the business instead of being spent on lifestyle purchases.
5. You did not mention life insurance. I think you should seriously think about getting some, especially on your husband-to-be. It sounds as if (God forbid) something would happen to him, you would have the wherewithall to manage the farm, but you would probably have to hire outside help, or shut down some of the operations. Make sure you'd have a way to pay off the loans.
December 6th, 2007 at 11:02 pm 1196982121
I think we are done buying equipment unless it can be paid for right away by him working for someone else, or it is necessary right now for the cows. Let the guys we do custom work pay for it! That is why we bought the row head...after 2 days of cutting the sunflowers, it was paid for (on paper...we still need to get paid actual money for it).
I am still putting money into my taxable mutual fund. $100 per month. You think that should stop, huh? Well, I wrote a question in the forums a few months ago about "when do you know when to stop" and I guess I was already feeling then what I am trying to figure out now. The taxable mutual fund and the 401(k) were questions in my mind...I finally decided on 4% for the 401(k) and save the rest for a different kind of investment. I would like to continue to do the Roth IRA for me, and open one for him...what do you think about that?
Finally, the week before we are married, I'm going to call the benefits center to let them know to add him to my plan at work. He'll get health insurance (YEAH!) and I was going to sign both of us up for life insurance...I think they allow that on my plan. Something else to check out. He'll be covered the day we get married.
December 7th, 2007 at 04:51 am 1197003088
6% is a fantastic rate!!! What bank is that? Are you in the USA? I'd love to open an account there!
If the money that is currently going in to the taxable mutual fund could be instead channeled to the business (farm) and put to good use there, then I would stop contributing to the mutual fund. If you run your business well (and it sounds like you guys are), you are going to get a much better return for your money from your business than from a mutual fund. [If you have any doubts, check out the book "The Millionaire Mind."]
Does your husband-to-be have a tax-deferred retirement plan for the self-employed? My husband has a SEP-IRA which allows him to contribute up to 25% of his net (up to a maximum limit of $45,000 in 2007). (I have a SEP-IRA too because I used to have my own business.) If your fiance doesn't have one yet, that's definitely something to look in to. Ours are with Vanguard. They have a Small Business Services Department that is super helpful; they can help you figure out which type of retirement plan is best for you based on the way your business is structured. Their phone number is 800-662-2003.
December 7th, 2007 at 08:36 pm 1197059798
I'll have to look for that book. Thanks! Most of the personal finance books are about not paying credit card interest but then they don't tell you what to do after that. I haven't seen many small business books.
He does not have any retirement plans set up. Before we started growing in the past 6 months, he really has been working for peanuts for other people. Why would a SEP-IRA be better than a Roth IRA? I don't know anything about them.
Ok, so how do I do this? We are going to sell the calves in January and I'll get a big chunk of money then. I know we have loan payments due in March and in April (we usually set up the different loans to only have 1 payment a year). So should I immediately pay them, because the interest on the loan is more than 6%? Or wait, because you don't know when you'll need the money between now and then? If we use it for something else, we'll be scraping by in March and April...I think I'll pay them as soon as I get the check.
December 9th, 2007 at 04:47 am 1197175629
As far as SEP vs. Roth IRAs, it's not a one or the other thing. If you qualify for a Roth, you can get both.
I'd recommend that you go to the IRS Web Site and read up on the rules for farmers if you're not familiar with the tax laws regarding farm income. From what I remember from a tax course I took at H&R Block long ago, there are lots of specialized rules about farm income.
December 24th, 2007 at 07:38 am 1198481934
Are all farmers in your area expected to have each and every piece of equipment necessary? Often farmers have the basics, then for more specialized things one has one piece, a neighbor has another, another neighbor has another. We even had one guy who had nearly everything and would rent equipment out. It sounds like that's the case with the row cutter, but you'll need to keep track of your neighbor's inventory for future purchases.
Since your farm income is going to be so seasonal, I don't think that 6 months is going to be enough. It might be enough if everything works according to plan all next year but since you're farming...not going to happen! (eg. All it will take is for something wicked to happen to beef prices for the plans for the veal to get spoiled.) I think you'll need at least 1 yrs worth.
But you asked how you make the leap between getting paid every two weeks to every 3-6 months? I'm thinking that you'll need two emergency funds - the job one (job and household) and the farm one (farm and real estate). The job one should be for 3 months, the farm one for 1 yr.
December 26th, 2007 at 06:36 pm 1198694211
For instance, the panels. Everyone needs panels, used panels cost the same as new panels, and if you bend a panel when borrowing it from someone else, you have to buy them a new one (like $90 a piece). Having him build a heavy-duty corral out of heavy pipe would be the best, but we don't have a piece of land to call our own to put it on.
On the other hand, we aren't going to buy a trailer any time soon. Lots of people have trailers that they don't use very much and there isn't as much risk of bending something or ruining something through normal use.
As for the two emergency funds idea, that is a great idea! I'll probably think of it as "emergency fund" (for household) and "operating fund." As in, these are the farm expenses coming up in the next 6 months (or 1 year...that is too scary for me to figure up now, but what I want to build up to...) and here is the money to cover those expenses. Not only loan payments, but other inputs too, like baling twine, diesel fuel, taxes, rent, equipment breakdown, etc.