Debt is risky regardless of wealth
Substantial wealth isn’t necessarily a shield against the downsides of leverage. O’Leary says many of his wealthy peers faced bankruptcy in their 40s because “they didn’t respect debt.”
Lifestyle creep, where living expenses outpace income growth, can ultimately lead to unsustainable levels of debt. O’Leary explains that instead of buying income-generating assets like stocks and real estate, many of his high-income peers “were buying boats and cars and watches and getting divorced; They loved their lifestyle, they went to zero.”
Indeed, many successful entrepreneurs and celebrities have faced financial ruin because they overleveraged. Godfather director Francis Ford Coppola confirmed on the Howard Stern show that borrowing money to fund his unsuccessful movie projects led him to bankruptcy three times. Rapper Curtis Jackson III, also known as 50 Cent, filed for Chapter 11 bankruptcy in 2015 after struggling to pay off his various loans.
These cases highlight how extraordinary success and substantial earnings can be quickly overshadowed by the reckless use of credit. In other words, you can’t out-earn bad decisions. Instead, it’s better to monitor and tightly control your personal leverage.
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Learn MoreHow to measure and reduce your borrowings
If you have debt, measuring it against your income is a good way to judge how risky it is for your personal finances.
SmartAsset, an online marketplace connecting consumers to financial advisers, recommends using the debt-to-income (DTI) ratio to assess your situation. You can calculate your DTI ratio by dividing the amount of money you’re spending to service your debt every month by your gross monthly income. A DTI ratio below 36% could be considered good while a ratio above 48% could be considered risky.
In other words, if you’re spending too much of your monthly paycheck to keep up with debt payments, you’re vulnerable to a personal financial crisis. A sudden loss of income or an emergency expense can throw your household budget off the rails.
Fortunately, American households seem to be gaining greater control over their DTI ratio in recent years. According to the New York Federal Reserve, the ratio of debt balances to disposable personal income (DPI) for all households in aggregate has dropped from 120% during the Great Financial Crisis of 2008 to 82% at the end of 2024.
If your household’s DTI ratio is higher than average, it might be a good idea to consider ways to pay off debt, negotiate for a better interest rate, seek the help of a debt consolidation company or boost household income.
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