Debt Free, Is It Worth It?
This is not a financial advice, please consult with your financial advisor before making any financial decisions.
# Thinking About It
Last year I made a decision to pay off all of my debts. I technically paid off my mortgage in March 2024, it was technically paid off by putting enough money in the autodebit bank account to cover the remaining installment, I just needed to verify whether the deduction was correct or not once a month, no need to worry about the mortgage anymore. Lastly my car loan last installment was in March 2025, it's paid off when I'm writing this.
Decision was not easy but was made relatively quick, only by numbers I would make more money if I invested the money in the stock market or put it in other investment. Actually I was quite comfortable with the debts, but after thinking for a while I came to conlusion that being debt free is going to be worth it, here's why:
- I'm able to put more focus only on building wealth. I have more room to take risks, be more bold on good opportunities. Definitely have more courage to average down on good stocks when the market is down.
- Generally I feel happier without debt, I can't measure it but it feels really good! I sleep better as well.
# Technically paying off mortgage?
My mortgage started in Apr 2018, the mortgage had a fixed rate of 6.5% for 5 years then floating afterwards, in my case it was 13.5%. Yes banks in Indonesia take very high net interest margin. I think it's worth to share that conceptually, mortgage installment amount consists of 2 parts:
- Principal amount: this is the amount that will reduce the remaining mortgage amount.
- Interest amount: this goes into the bank pocket.
For every installment payment, it will deduct the principal amount and some of it goes to the interest. Most banks use annuity calculation for mortgage where the interest amount is higher at the beginning of the mortgage period and the principal amount is higher at the end of the period. In other words your early installment payments will just mostly pay the interest, mostly goes into the bank pocket 💰.
Back to the mortgage deal, 6.5% was quite high compared to other banks, but it had a benefit that the saving account interest rate will match the mortgage rate as well. This is a big deal if you're planning to put more money in the saving account. I got 6.5% interest rate on saving account for the first 5 years, the 6th year it was floating around 13.5% because mortgage interest rate was also 13.5%. The interest on the saving account is not paid directly into the account balance, rather it deducts the interest from the mortgage installment amount. Technically the mortgage interest would be 0 if you put enough money in the saving account and all the installment payment will deduct principal, in other words 100% of installment payment will deduct the remaining mortgage amount.
What I did to pay off the mortgage was quite simple, I looked up the outstanding mortgage amount then divide the amount by net % after tax on interest, that's the amount I need to put in the saving account so that the installment payment would be deduct 100% only to the principal, 0 interest. Just for example, suppose tax on interest is 20% and my outstanding mortgage is 1000, I would need to put 1000 / (1 - 0.2) = 1250 in the saving account. It will be more than enough to cover the remaining installment. The reason I like this approach compared to fully settle all at once is because in loan contract there's a 3% penalty for early loan settlement, in addition to that if there's a super urgent needs for cash I can just withdraw the money from the saving account, though I forbid myself to do that.
# Moving forward
Having an option to leverage is good, but I think it's better to avoid debt if you can. Debt can give a false sense of security, it can easily confuse you to think that you have the capability to buy things.
Since the mortgage paid off, I always try to avoid debt. Even if there's a 0% installment plan on some of my big purchases, I always choose to pay in full. On the other side paying in full have its own benefits especially for collecting miles, some banks have a policy that you won't get the miles if you choose to pay in installment.