Recently one of the DTH provider heavily promoted Long Duration Pack. The key message was that usually husbands forget about month recharge of DTH. Therefore, Long Duration Pack is best suited for busy families. It’s like fill it, shut it and forget about it. I was quite impressed with the family Ad of the DTH provider. Tough i always recharge my DTH Connection on time but due to prepaid nature of the service, i thought of giving it a try. A couple of days back, i told my wife why don’t we opt for Long Duration Pack of our DTH provider. My wife was not convinced. She said that there is no benefit as semi-annual pack offer savings of just Rs 80, and annual pack savings is Rs 250. We decided against Long Duration Pack. Matter closed on the dinner table. At this point, i was not aware that this discussion is going to be a BIG LEARNING for me. Finally, it turned out to be a personal finance case study :).
Next day, i was planning to recharge my DTH connection. The one thing that i don’t like about DTH connection is prepaid connection and absence of recurring payment options. I am a big fan of postpaid connections, and all the bills are paid through ECS or Online Bill Payment facility. I need not remember the last dates. A bill is directly presented to my bank. They deduct and pay my bill seven days before the due date. So convenient, isn’t it. In the case of Long Duration Pack, though the service remains prepaid you recharge in advance. There is no facility to register ECS or auto bill payment. You always need to remember recharge date. DTH providers are quite proactive to remind subscribers, but it is too intrusive. Seven days before recharge date, you can only see recharge reminders all over. With this thought, i decided to consider Long Duration Pack.
The biggest disadvantage of being into a personal finance space is that you think too much about money. It is both good and bad. Good because you can save money and create wealth. Bad because sometimes you go to the extreme. I believe that it is a habit. Habits are tough to change. The objective of this post is not to waste the time of readers by discussing savings of few hundred bucks. It may not worth your time debating this topic, but bigger message is how we can take decisions on personal finance front. Kindly treat this post as personal finance case study. Sometimes, the picture at a macro level does not give a real picture but micro-calculations through some interesting results. We will check in the following section.
Long Duration Pack – The maths behind the same
Next day i explained to my wife the entire maths behind the same. Let’s check out :). I was planning to subscribe to a Long Duration Pack X. The monthly charges are Rs 250. Whereas, semi-annual charges are Rs 1420 and annual charges are Rs 2750. Prima facie it looks that annual pack is more beneficial compared to semi-annual pack. Back of the mind calculation of customer conclude that saving in Semi-Annual Pack is just Rs 80. Under the annual package, savings is Rs 250 as my wife explained to me. It is not the correct way to look at it.
First let’s consider the semi-annual pack. As a pure maths, If i pay every month Rs 250 then for six months my payout will be Rs 1500. Under semi-annual Long Duration Pack, i will be paying Rs 1420 i.e. savings of Rs 80. In absolute terms it is minuscule, but we should calculate CAGR. The CAGR return on Semi-Annual Long Duration Pack is 11.76%. On the other hand, the monthly payout on annual Long Duration Pack is Rs 3000. The payment under annual pack is Rs 2750 i.e. savings of Rs 250. The CAGR return on Annual Long Duration Pack is 9.12%. To conclude, it makes more sense financially to opt for Semi-Annual Long Duration Pack as return/savings is HIGH compared to Annual Long Duration Pack. Moreover, tax free double-digit returns during volatile times mean approx 15% Pre-Tax Return.
The idea that we rejected on Dinner Table was in fact quite lucrative. In this case, the amount is little. Therefore, it may look foolishness to devote FULL POST on same. In past, we might have followed same thought process in personal finance decision making. If yes then we may have missed some big ideas or opportunities to earn/save money. I will share it in learning section.
Icing on the Cake
Once i was convinced that it is beneficial to opt for Long Duration Pack. i started searching for any offer on DTH recharge. The last year, e-commerce players were providing best offers and this year belongs to Mobile Wallets. It is no brainer where you can find best offers. Just check newspapers for reports on start up funding. Recently mobile wallets received adequate funding. Therefore, you can get a lot of cashback offers and discounts. I recharged one of the mobile wallets with Rs 5000 and received instant cashback of Rs 250 i.e. 5% discount. For DTH recharge, One of the mobile wallet providers is providing a cashback of Rs 125 on DTH recharge of Rs 1000.
Therefore, the net cost of recharge of semi-annual Long Duration Pack is Rs 1295. In short, the CAGR of whooping 34%. Tell me a single financial instrument that provide this kind of return on investment. In other words, you can also generate a profit from your spendings. Provided the amount is spent is on NEEDS not on WANTS.
Learnings from the Case Study
From this entire episode, there are three learnings for investors from a personal finance perspective.
1. Don’t reject any personal finance idea without Analysis: Most of the times we reject some brilliant ideas without giving a thought or analysis. It is important to understand the logic behind the same. The best way to accept or reject any investment idea is through financial analysis. It will give more objective and practical analysis of the financial product. For example, in the case of Long Duration Pack, prima facie the idea was not convincing enough. Financial Analysis proved that it was a good option. Further, it threw some interesting results i.e. between semi-annual and annual pack, semi-annual is more beneficial.
2. Always explore options to maximize return: Once an investor is convinced with the investment idea, the next logical step is how to get the maximum benefit. For example, if you are investing in mutual funds then you may opt for funds that provide additional insurance cover for free. Provided the fund is best-performing fund. In the example mentioned above of Long Duration Pack, a simple exercise increased returns to almost three times. Therefore, it is imp to do some research before finalizing the product.
3. You can generate returns/savings from Spending: Last but not the least, we never think of how to save while spending. Recently, i was planning to buy some stuff from Lifestyle. A little bit of research on the web helped me to save 20%. A gift card of Rs 1000 was available for Rs 800 i.e. 20% cashback offer. The only catch is that my planned purchase should be Rs 800 or more else it is impulsive buying. I should not buy Rs 1000 gift card for a purchase of Rs 400.
Hope you enjoyed the personal finance case study, and together we have learnt some imp lessons on personal finance.
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