{"id":547318,"date":"2010-04-29T12:20:22","date_gmt":"2010-04-29T16:20:22","guid":{"rendered":"http:\/\/www.businessinsider.com\/what-a-rich-kid-with-a-credit-card-can-teach-you-about-the-federal-budget-2010-4"},"modified":"2010-04-29T12:20:22","modified_gmt":"2010-04-29T16:20:22","slug":"what-a-rich-kid-with-a-credit-card-can-teach-you-about-the-federal-budget","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/547318","title":{"rendered":"What A Rich Kid With A Credit Card Can Teach You About the Federal Budget"},"content":{"rendered":"

\"preppy\"(This is a guest post from the author’s blog<\/a>.)<\/em><\/p>\n

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.)<\/p>\n

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.<\/p>\n

Billy’s parents look at his credit card statements and freak out.  They realize that they co-signed his credit card application, and they are therefore ultimately responsible for Billy’s debt if he cannot pay it from his allowance.  They sit down with him to discuss how to bring his credit card debt into line.  It’s not the $2,000 of existing debt that worries them.  It’s the continued borrowing, and the expected increased future borrowing once he gets his driver’s license next year.  They are worried about Billy’s annual deficits and his growing debt.  They track his borrowing with a graph they hang on the refrigerator door.<\/p>\n

Billy explains that if they are worried about his borrowing, the answer is simple:  increase his allowance.  That can reduce or even eliminate his future deficits.  Next year his parents need to raise his allowance by $2,000 so that his annual credit card borrowing does not increase.  It will probably be even more in future years, because he plans to have many friends and drive them many places.  Cutting his spending and increasing his allowance will both reduce his future borrowing, and Billy would prefer that his parents increase his allowance because it’s easier and less painful for Billy.  This will allow him to keep his longstanding promise to his friends.  They’re counting on him.<\/p>\n

Billy’s parents realize that Billy’s annual borrowing, his annual deficits and increased credit card debt are not the actual problem to be solved.  Billy’s increased borrowing is a symptom of his underlying problem, which is his increased spending.  They see why it’s a mistake to focus only on the credit card debt and additional borrowing, because that leads Billy to conclude that allowance increases and spending cuts are equally valid solutions.<\/p>\n

A little bit wiser, Billy’s parents now explain that every dollar of additional allowance for Billy means less for the rest of the family.  If Billy cuts his spending, his future annual credit card deficits will decline.  If Billy’s parents increase his allowance, his credit card deficits will also decline, but the rest of the family (including little Suzy) will suffer.  Billy’s parents explain that they care about the promises Billy has made to his friends.  They also care about the interests of the rest of the family, and they must balance those competing interests.  They tell Billy they are particularly worried about the projected future costs of his promise to drive his friends all over town beginning next year.  Maybe he needs to rethink that promise so that he does not make the rest of the Jones family suffer through some combination of higher allowances and credit card debt.<\/p>\n

Billy’s problem is not his credit card borrowing.  It is not that his allowance is too small.  Billy’s problem is his increased spending, now and in the future.  That higher spending can be paid either by bigger allowances this year, or by borrowing more using his credit card.  Billy’s allowance and his credit card borrowing are the results of his initial decision about how much to spend.  Bigger allowances for Billy this year mean less money this year for Mom, Dad, and little Suzy.  More credit card debt will require bigger future allowances to pay it off, which will mean less money in the future for Mom, Dad, and Suzy.<\/p>\n

Billy’s parents recognize that the combination of an allowance plus an apparently unlimited credit limit lead Billy to make irresponsible spending commitments.  They shift their attention and family debate from Billy’s credit card borrowing to his spending habits.  They make decisions about how much Billy will be allowed to spend.  Once they have decided that, they then allocate that spending between current allowance and credit card borrowing, to determine how much the rest of the family will have available to spend this year, and how much in future years.  They still care and are concerned about his annual deficits, and they still track them on the refrigerator door.  But they move that graph down to make room for another graph to track Billy’s spending habits.  They know that if they get Billy’s spending under control, then the allowances and credit card borrowing will automatically fall into place and the rest of the family’s interests will be protected, now and in the future.<\/p>\n

Billy complains about having to cut his spending.  Billy’s friends complain even louder, and tell Billy his parents are mean and selfish for forcing him to break a 10 year old promise.  And yet as Billy’s parents consider the future of the entire Jones family, they know they are now on track to responsible family finances.<\/p>\n

Tomorrow we will look at how Billy is spending his parents’ money and the promises he has made to his friends.<\/p>\n

Read more from economist Keith Hennessey –><\/a><\/p>\n

Join the conversation about this story »<\/a><\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

(This is a guest post from the author’s blog.) 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 […]<\/p>\n","protected":false},"author":5836,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-547318","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/547318","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/5836"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=547318"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/547318\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=547318"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=547318"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=547318"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}