If you have read several of the other posts you probably know that off-farm income is part of the reality of farming these days. Going full-time on the farm is the dream for many. There are a number of different strategies you can take to get there by using economies of scale and diversification. Let’s talk about what options you have when you get to the point where farming full-time is a possibility for you and what that might look like.
First of all, your farm needs to be generating a profit. If your farm is not operating at a profit, resolve that issue first before you do anything else. There is no point in quitting your off-farm job to cause you needless additional hardship. Generating a profit with agriculture is possible and very important to your long term success and survival as a farmer. That profit is what is going to allow you to quit your off-farm job.
Your farm needs to be generating enough revenue to cover all of the costs associated with your farming activities, as well as the mortgage, your personal living expenses and add to your savings.
Adjust your calculations
Once you have made sure you are consistently profitable, it is time to adjust your farm budget. In your expenses, you should have a line for salaries. With a few exceptions, you should always expect to pay yourself in your farm business. If you can’t be profitable and pay yourself, you need to work on that first. The only exceptions to this are when you are starting out and self-financing an expansion. In that situation, you are likely living from income earned elsewhere and reinvesting any profit you do make.
When you are looking to make the jump from off-farm income to full-time farming, move that salary line up to the second thing on your budget. Depending on your family situation, a decent starting point is probably $30,000. Since your house is likely included in the farm mortgage and utilities, your other living costs should be covered by $30,000. Update your budget to look something like this:
- Farm Revenues less
- Farm expenses
- Financing costs
- Net income (zero or higher)
The reason you want the salary to be your first expense is the principle of profit first. You need to withdraw your salary first so that it is not negotiable. Otherwise, you’ll be tempted to spend it on the farm. Use separate bank accounts and withdraw your salary to your personal account on the first of every month. You can set up an automatic withdraw for $2,500 every month if your salary is $30,000. That money comes out and the rest of the costs of your farm business need to be covered by whatever is left.
Once your budget is updated and you have that automatic withdraw in place, practice living for a year as if you had no off-farm income. Save the entire amount of your off-farm income in a TFSA or top up the squirrel fund. Invest it, save it, do something with that income that does not involve spending it on yourself or the farm. Consider that the start of your retirement fund or your children’s college savings.
Make sure your squirrel fund is topped up and has 4-6 months’ worth of expenses saved in it. If you can resist the temptation to touch the amount you save up, this will be the self-insurance you have when it’s a bad farming year. They happen.
If something goes terribly sideways in this practice year, you haven’t quit your job, you have a decent amount of savings and you can find a new solution. You could even scale back to part-time but quitting to farm full-time without knowing that it’s going to work would a risky move.
After that first year, where everything went well and you feel financially comfortable, you can draft that resignation letter. You can adjust the salary higher if needed. If the withdraws met your needs and there was money left over, do not be tempted to lower your own salary. Add it to your savings so that you can go on vacation or make a house renovation.
By making your salary your number one expense and an automatic withdraw like a mortgage payment you can be sure you are paying yourself for the work you have done. You would not work for free for an employer so you should not work for free for your own farm business. Make your farm profitable, pay yourself and you can quit your off-farm job.
BONUS BABY STEP TIP: if you are starting out or expanding, start your monthly withdraw at a lower level as soon as you can and when you reach the equivalent of your off-farm salary, start the transition to farming full-time. Even if that is $100 a month, start somewhere.