Meet the four person Jones family, which after taxes had $100,000 of income last year. For some strange reason, 15-year old Billy Jones is not allowed to work or earn any income. For some even stranger reason, Billy’s parents give him an allowance of about $50 per day, totaling $18,000 last year. Billy’s parents also gave him a credit card with no apparent credit limit. Billy spent $20,000 last year, therefore running up $2,000 of credit card debt. (Billy is spoiled rotten.)
This year the Jones family expects to have $105,000 of after-tax income. Billy announces that he plans to spend $21,000 this year, the same proportion of the total family income (20%) as last year. His parents shrug and increase his allowance to $18,900, the same 18% of total family income as last year. Billy therefore expects to add $2,100 of credit card debt this year. He also announces that when he was five years old he promised his friends he would drive them wherever they wanted once he turned 16, so he expects his spending will soon grow by $2,000 per year. He explains to his parents he’ll just put the gas costs on his credit card if they don’t increase his allowance.
