Kevin O’Leary hates debt and uses cash for purchases. Why it's important to know your debt-to-income ratio to avoid financial ruin

Shark Tank star Kevin O’Leary insists he hates debt.

“I buy things in cash,” he told YouTuber Graham Stephan in a 2021 interview. “I don’t want an obligation to anybody.” (1)

However, Stephan argued that it’s probably easier to avoid debt if you’re already fabulously wealthy. O’Leary's has an estimated net worth of US$400 million thanks to successful business ventures and investments. Unlike the typical American worker, he doesn’t need to rely on personal loans and credit cards to make ends meet.

But O’Leary’s surprising response highlights how dangerous debt can be, even for some of the wealthiest people.

Substantial wealth isn’t necessarily a shield against the downsides of debt. 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 debt. O’Leary explains that instead of buying income-generating assets like stocks and real estate, many of his high-income peers overleveraged themselves: “they 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 took on too much debt. Godfather director Francis Ford Coppola confirmed on The Howard Stern Show (2) 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.(3)

These cases highlight how extraordinary success and substantial earnings can be quickly overshadowed by recklessly using credit. In other words, you can’t out-earn bad decisions. Instead, it’s better to monitor and tightly control your personal leverage.

How 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.

Many online marketplaces connecting consumers to financial advisers suggest using the debt-to-income ratio (DTI) to assess your situation. You can calculate your DTI ratio by dividing the amount of money you spend 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 paycheque 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.

Household debt continues to remain high in Canada, but shows some signs of subsiding, according to the Government of Canada. (4) As of the first quarter of 2024, the DTI ratio for Canadian households dropped to 176.4%. This means for every dollar of disposable income, they owed about $1.76. Despite this slight improvement, the DTI for Canadians is still much higher than before the pandemic.

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.

Article sources

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Graham Stephan (1); The Howard Stern Show (2);The Guardian (3);Government of Canada (4)