Another big idea from All Your Worth is that the rules of money have changed. The old money advice no longer applies. So what were the old rules?
Well, not too long ago, a middle-class family who made a decent income and lived normal lives pretty much had their finances in balance. An average, one-income family could afford a middle-class home without much strain.
Our parents’ parents didn’t need a fancy financial planner to help them determine what house they could afford, they just walked down to the local bank. If they tried to get a larger mortgage than they could afford, the lender turned them down. They didn’t have to worry about getting into too much trouble financially because it wasn’t possible to get over-leveraged.
The same held true for other aspects of debt: a car note, remodeling the kitchen, etc. (and car leases didn’t even exist). The lender met with them face to face, reviewed their finances, and if they couldn’t afford it, were turned down. As a result of these practices, it was almost impossible for our grandparents to get into too much debt. So, how have things changed? Here’s what the authors say:
“The old guarantees no longer exist. In today’s world, you can get a mortgage that is too big for you—and the banks will help you do it. You can get a car lease that chews up half your income. You can wind up with a student loan bigger than some home mortgages. And as sure as the sky is blue, you can rack up credit card debt without blinking an eye, even if you don’t have 50 cents to make your payments.”
I agree the rules have changed. And I found the first sentence to be pretty prophetic of today’s financial crisis (the book was published in 2005). So, how do we deal with the change in the rules? As the authors explain, you have to get your finances in balance, the subject which occupies the rest of the book.