Why family living and a budget is important for your land loan application.
During the application process for a land or farm loan, an FCS Financial loan officer will ask an applicant about their income and expenses. Often people estimate or guess at the expense number, then when they actually track all their expenses they are very surprised at how much they spend each month.
What is family living?
This is the amount of money a family lives on each month. Family living includes everything: food, utilities, debt and entertainment. Many do not track this amount but it is important to know where your money is going, what it actually costs for your family to live at your present lifestyle each month and eventually create a budget.
Why is family living important to my loan application?
Whether you are a farm family or a family who loves the rural lifestyle, most have just one pool of money to pay all your debt. The money flowing into the pool may come from multiple sources such as farm income, off-farm paycheck or rental property. That pool must pay for debt, mortgage and farm expenses, and all the costs a family has like food, clothing and entertainment.
This number is important for a loan application because it helps determine if you can make your new loan payments and keep your lights on. A monthly budget shows the lender how you manage and spend your funds. This historical information can be very helpful for the loan application.
What if I don’t have a budget?
If the word budget brings on cold sweats and shakes, you are not alone. Sarah in our marketing department shared her thoughts on budgeting.
“I tried creating a budget multiple times. It felt so confining. It was like telling myself I was only going to eat vegetables for a month, it just made me want Oreos and lots of them. I would get frustrated and quit after a week. My theory was as long as there was money in the bank, I was ok.”
Sarah said her theory worked fine until one December when the “lightning deals” got the best of her. At the end of December, she realized she had to get a handle on her spending in the New Year. She knew kicking off January with a budget based on thin air was not going to work.
How to create a budget.
Dr. Alex White, Virginia Tech University, spoke at an FCS Financial Young, Beginning Ag Seminar. He talked to the young farmers about personal finance and retirement strategies. One of the personal finance topics he discussed was expenses and the importance of knowing where their money is going each month.
Dr. White suggested the young, beginning farmers start tracking expenses so they can see where their money goes each month. His suggestion was to take a piece of paper and write down each time they made a purchase, even if it was for a soda at the gas station. For those who don’t like the paper method, you can do the same thing by using the notes section of your phone, an Excel spreadsheet or there are lots of apps available.
If tracking expenses makes you want to hyperventilate, think of it as an experiment to see if you can track your expenses for a month. Start with just a month; spend as you normally do, simply write down what you spend.
The experiment theory is what Sarah used. Her goal was to spend normally and then evaluate her spending at the end of the month. She used an app on her phone to track all her expenses. She assigned a category for each expense so that at the end of the month, she could see the category totals.
Analyze Your Expenses
Following the first month of her experiment, Sarah evaluated what and where she was spending money. She set up a budget based on the expenses from the experimental month. The app she used transferred each category and amount to the next month. Then she adjusted for planned expenses that she knew were occurring that month.
A budget allows you to confidentially tell your loan officer how much you spend for family living each month. The hardest part of developing the budget is starting. It will pay off because you can track where your expenses are going and make tweaks within your budget if you want to save for a long-term expense like additional land or equipment.
