Month: August 2019

In the last few years, the complaints from airline passengers have gone up with respect to issues like flights cancellations, loss of baggage and delays. Most of the times, the passengers find themselves with no help and bad attitude from airlines staff and the company itself.

Last month, I was travelling from Ahmedabad to Pune and my flight was scheduled to leave at 10:30 pm in night. However, the flight was delayed. First, it showed 30 min delay, and soon it stretched to 2.5 hours.

I along with many other passengers had no information about the delay. I also heard a passenger murmuring – “Will they provide us snacks?” after a 2-hour delay.

This made me think if an average airline passenger is aware about his/her rights in case of flight delay, cancellations or baggage loss?

Few months back, on 28th Feb 2019, a new airline passenger charger was announced by The Ministry of Civil Aviation which clearly defines the rights of travelers and liabilities of airlines that are operating in the domestic sector. It defines various important points and a guideline for passengers seeking redressal of their grievances, with regards to fares, flights, refunds, catering, and baggage, etc.

Before we start looking at all points, first as a passenger you should know various reasons why a flight gets cancelled or there is a delay! or for what matter a baggage is lost.

• Due to unoccupied seats to save their cost
• Due to overbookings
• Mechanical Issue
• Technical Issue (server crash, system failure)
• Natural Disasters like flood, cyclone, Earthquake etc.
• Bad weather conditions
• Political Disturbance/ Government regulations/ Civil War/ Strikes
• Mistakes of Air Traffic Control (ATC)

Now, Let’s look at various rights of airline passengers one by one.

1. Flight Delay

Let’s first look at the delay of flights which is what happens most of the time. If your flight has been delayed beyond a limit, the airline will have to offer you refreshments and free meals (for passengers waiting at the airport). The table below defines this.

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Note: Block time means the total time from the moment an aircraft first moves for the purpose of taking off until the moment it finally comes to arrival gate at the end of the flight. In simple words, it is a total travel time of flight.

2. Cancellation of flight

Flights do get cancelled at times for various reasons like airlines mismanagement, weather conditions or other reasons.

There are two cases here.

Case 1: If the flight cancellation was informed to passenger before 24 hours

In cases where the flight cancellation was communicated to the passenger well in advance (before 24 hours), the airlines have to either arrange for an alternative flight or give full refund to the passenger, as acceptable by passenger.

Previously, airlines used to cancel the flights at the last minute or before few hours of departure and just refunded back the ticket money, which is history now.

Case 2: If the flight cancellation was not informed to passenger before 24 hours

If flight is cancelled within 24 hours of departure (or last-minute) or the passenger misses the connecting flight because the previous flight was delayed (on the same ticket), in that case, the airline has to provide you extra compensation of up to Rs 10,000 apart from full refund or alternate flight.

So imagine you are at the airport (or on the way to airport) and the flight is cancelled. In, this case, you will get 2 things. First is, either of a full refund or an alternate flight option (you can choose any of them) and the second thing is a compensation of up to Rs 10,000 depending on how long was your flight.

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Few Important points

• If you have checked in already in the airport, the airline has to also provide you with refreshments as per waiting time.
• You should have provided the contact information at the time of booking, else the airline is not liable to compensate you.
• You will not be eligible to claim any compensation on delay or cancellation of flight due to reasons which are out of control of airlines like bad weather, political unrest, a natural disaster or labour disputes.
• Airlines are not supposed to give compensation parts if the delays or cancellations happen because of security risks, air traffic controller or metrological conditions.

3. Boarding denied due to overbooking

Many times, airlines overbook the tickets in assumption that some passengers will not turn up or cancel at last minute if that happens and you are denied boarding the airplane then you can claim as follows if you have confirmed ticket,

Scenario # 1: If the airline arranges for an alternative flight within 1 hour of the scheduled departure of the original ticket, in that case, you can’t claim any compensation.

else

Scenario # 2: If an airline is not able to arrange for an alternative flight within 1 hour of the scheduled departure of original ticket, in that case, you are liable to get any of following 3 things

• 200% of booked one-way base-price + airline fuel charge, up to maximum of Rs 10,000 if the airline arranges for an alternate flight up to 24 hours from old scheduled departure
• 400% of booked one-way base-price + airline fuel charge, up to maximum of Rs 20,000 if the airline arranges for an alternate flight after 24 hours from old scheduled departure
• If you do not opt for the alternate flight, in that case, you will get full refund of the ticket price paid + 400% of booked one-way base-price + airline fuel charge, up to maximum of Rs 20,000

If you look at this new rule, it does a great justice to the passengers as the passengers had to spend a lot of money on book alternative flights at the last minute. Now the compensation is fair which helps passengers.

4. Loss of baggage or damage to baggage

In case of domestic flights, the airline is liable to pay you up to Rs. 350 per kg or up to Rs. 20,000 in case of loss/damage/delay of baggage

In case of international flights, the airline is liable to pay you up to 19 SDR per kg or up to 1131 SDR in case of loss/damage/delay of baggage. SDR here is a kind of currency value which is accepted internationally.

5. Change in the name of the passenger within 24 hours of booking the ticket

Now you can make changes in the ticket (corrections in names of passenger) within 24 hours of booking the ticket. Earlier after booking, any correction in name of passenger was generally denied by airlines and was treated as cancellation. This will give relief to customers as at times there are name mistakes in tickets or change of plans.

6. Cancellation of ticket

Case #1 – If tickets are cancelled within 24 hours of booking tickets

Earlier, canceling a ticket cost the passengers a huge penalty even if it was done immediately after booking the ticket. But with the new rules, if the ticket is cancelled within 24 hours of booking (provided there is a more than 7 days difference between booking date and departure date) then you will not be charged any additional charges.

Case #2 – If tickets are cancelled after 24 hours of booking tickets

In this case, following is the rule

• Airlines cannot put any cancellation charges for cancelling the tickets.
• Airlines should refund all statutory taxes, user development fees, airport development fees, passenger service fees to you
• Airlines can’t hold the refund in terms of credits forcefully. It’s not a default option now, however, if passenger agrees to it, it can be done
• Airlines have to clearly indicate the refund amount in case of cancellation in future.

DGCA has defined rules of refund and claim settlement for all airlines. If you have paid cash for your booking then you will receive the refund & compensation in cash at the counter. And if you have made payment via credit or debit card then the amount will be credited in your bank account within seven days.

Escalation of complaints

You can use Air Sewa, a grievance redressal system to take help on any issue related to civil aviation in India. We hope that these changes in the airlines’ rules will now help passengers a lot and will make things fair for them.

Do let us know if you have any queries, we will solve it in the comments section.

Today I am going to share with you an amazing journey of one of our readers who was deep into debt many years back and how they finally broke that unending cycle debt trap and came out clean after a lot of hardship and courageous decisions he took in his financial life. This is the story of Pranay Kumar who is from a rural town of Maharastra.

The town had small local banks (one room banks / 2 branches banks) from which his family had taken loans and the life took turns in manner that he was soon into a debt trap. His story is inspiring and nerve wrenching at the same time. We had changed the name of the reader due to his request and shared his story in his own language which we received over email with minor grammatical corrections.

Background

I had a total 11 loan accounts when I entered into IT field as a software engineer in the year 2004.

All these loans were in existence because of my ancestors and relatives. We had. We had some family business in town in the year 1998 which my uncle took over. My father was jobless and with no motivation (bad mindset), he tried to make a business run again, but it failed. Along with that failure, there were my engineering expenses (fees + hostel from 2000 to 2004) for four years and BAD friends of my father – all this contributed to our growing debt over time.

Lesson from my father – “Make poor but wise friends rather than rich but mean”

To run the business, my father took an initial loan of Rs 2 lakh for the construction of a site and material. Then somehow it failed, so he got another Rs 50,000 back in yr 2001, along with another Rs 15,000 of personal loan for my engineering fee for the first year in the year 2000.

So by the end of 2001 financial year, we had Rs 2.65k loan and there was no source of income!.

At this point in time, we had no relatives who came close to help except my mother’s father and brother. My father had zero sources of income at this point. So my mother started a coffee shop near a school. Just to earn enough for food.

At this point, we lost help from most of our relatives. Interest rates in small towns are different when it comes to personal banking. Rates were starting from 18% to 25%.

In yr 2002, the 2 lakh account got in trouble as interest was high. So my father opted one brand new loan from another small institution, worth rupees Rs 1.5 lakh. He divided this money and cleared up the interest of all other 3 loan accounts, so we had like 4 accounts with all principal due, which is like Rs 3.7 lakhs.

Also one interesting point we learned that my father was borrowing additional money from his friends which were supposed to be repaid. It seems that this 4th loan was used for some reason.

My Education Loan

Later I opted for an education loan of 45,000 for my engineering. This was the 5th loan.

Every month of march – there was a rush. Father didn’t do work, the mother ran a shop which was just sufficient enough for 1-time food.

Father stopped sending money in my engineering, as the fees were covered by education loans. So at this particular point in yr 2003, I had to take some sharp moves in so-called cutting expenses.

• I dropped a one-time mess
• My friend from a native place used to bring food from their home.
• I dropped using bus/rickshaw.
• With my engineering, I started working at a place in Sangli, for a salary of 800 rupees per month.
• Used to ride 16 km per day using a bicycle.

All this helped me with rent + one-time food. Father didn’t have to send money but it was a tough time for me. I didn’t have enough money for books. During this time, Guthka was banned in Maharashtra, but Karnataka had the shops. So, I went to the Karnataka border, which was some 40 odd kilometers away and with my monthly salary, I bought 2 big packets of it and gave it to our librarian, who in return gave me 6-8 books.

I came 3rd rank in that year. Now I feel bad about such a deal but times make a man do miserable things.

Bank misguided us to renew the loans

So no EMI was paid till this point of time and on top of it, the local banks misguided us and asked us to renew our loans.

Out of five loan accounts, four accounts got renewed. Education loan wasn’t kicked off until I finished my education.

Let me share how this renewal scheme works in case of loans. It works like this – Suppose I have a loan account with due outstanding of 75k, then it was asked to split in two accounts like 35k in one account and 40k in one account, as money was now spread across two accounts. So instead of one, charges would be applied to two bank accounts (e.g. – postal charges: Rs 200 per account, maintenance: Rs 200 per account, legal case: Rs 1000 per account). So we had the following list of accounts

• Bank 1 – 3 accounts
• Bank 2 – 3 accounts
• Bank 3 – 2 accounts
• Bank 4 – 2 accounts

So in total, there were 10 loan accounts at that point in time.

Every March was disastrous. My father had to go to court, police n all. Bank people used to fight, as they used to come to my house, they used to mark the furniture so that it can be decided which bank will take which one. My mother used to have Bentex Gold jewellery, they even took that.

Note that we are talking about very small rural banks and not the big banks here. You will not even hear some of these banks names.

The first Job started with 10 loans

So there were 10 loan accounts when I got into my first job in Bangalore with a salary of Rs 15,000 per month in Nov 2004.

Later after 3 months, the salary came down to just Rs 5,000 per month. I used to stay in a Dharamshala where people can sleep in the night for Rs 35 rupees per stay, day time it was not allowed to be there. I spent many months there.

My father was doing the same thing even then. He used to renew the loan (principal + interest = new principal amount). My mother was running a shop for food. So in 2005, it was almost impossible to even think of repaying the loan, as I had just Rs 5,000 salary.

I shifted to Noida with a new job which paid me 16,000 per month. My own expenses were around Rs 3,000. I was sharing a room with ex-colleagues of my first job, which helped me a lot.

There was no PF or tax-saving from my side.

I started giving a 90% salary for clearing loans

From that point onwards, I went to an extreme end.

I started giving 90% of my salary to banks in clearing loans. 10% was for my survival. Believe me, this couldn’t take down a single bank, as interests were very high. Because of the legal cases, the father was about to go to jail. So I went to ICICI bank as I needed urgent money and took another loan of Rs 1 lakh to just to pay the interest – the interest rate was 21% interest!

I gave it to my parents to just pay the interest. Legal case was withdrawn for some time and parents renewed the loan, Again.

At this point, the total loan count was 11

I had to do something extraordinary to get out of my debt trap. I opted for another job, outside India and tried to make up more money. In just 7 months, I made around Rs 5 lakhs in Japan/US.

But when I landed back, my sister’s marriage was fixed :), so half went into her marriage. The other half was supposed to go to a bank, but my father paid only interest. This was the time where I almost gave up in life. But somehow I got another job, back in Bangalore, double than what I was earning.

Tracking all the Loans

I created a document, excel sheet document, to track all my loan accounts.

My per month my take-home was Rs 50,000 at this point in time, so I was paying Rs 40,000 to banks and Rs 10,000 was for my and family survival.

Initial 4 months, one bank loan closed down, the other 10 still running. I approached each bank at a time and told them that I am working on repaying them back soon(legal case, bank control over house furniture and property was done, so nobody would have done any more harm to us, except killing us).

A Big Shocker! – Messy bank statements

I started digging into documentation and then a big shocker came. Every bank, almost every bank had problems in their bank statements. I thought my parents are taking care of the documentation part, but there was a MESS.

I started asking for printouts from these banks. They were saying – each printout would cost you Rs 25. I knew there is something fishy there, hence I paid and got the statements.

Kudos ! – miscalculation worth 30,000-40,000 was there ! . From then, every month I had to fight with banks in recalculation. Later took help of a govt officer and told them that I am complaining to some bank authority about this loot.

Finally, I was left with a minimum 8 big loans and 3 minor loans. At this particular time, I had to make tough choices. I created an excel sheet for all these loans, utilized my bonus+awards in office, wiped out loans which were less than Rs 50,000. I targeted one loan every month. The main reason was – all loans were in a default state, so I didn’t have one important aspect called ‘Breathing Period’ .

First Loan wiped out

With my first wipe-out, I took down the first Bank loan. Here, my mother diagnosed the balance sheet/loan details, found out a missing calculation worth 20,000-25,000. We asked bank guys to reduce that loan amount, saying I would pay in one shot. The amount was around 50k.

90% of the salary was gone in one month. I managed to take the loan count down, but due to all this, I had to drop my MS plan.

In start of 2010, I took down my education loan and personal loan of Rs 90,000 in two installments, for which I borrowed money from friends.

In March 2010, I cleared another Bank loan of 3 lacs. Then I took down one more big loan amount of 2 lacs. At this point – my other sister came home for her childbirth :), so I had one more responsibility.

So I decided to pull down loan in three attempts. Went to the bank owner – He was the same guy who offered us loans like offering tea, now when we asked him to reduce the loan, they said NO.

Interestingly, my father had kept house papers as liability – so there was no chance to get amount reduced. So I approached for EMI payment papers. They took one week to give it to us and later it was a big shocker – postal charges of Rs 900 for one time , admin charges 750 rupees +, etc.

At the same time, I was also paying Rs 2500 for ULIPs and Rs 42000 per annum for LIC Jeevan Anand and also had to pay back the money taken from friends.

I raised my bar of payments, I paid more than 2 lakhs in 2 months (my plan was simple – make huge payments around the salary date.

Some improvement after many years

So as these three months went by, another bank came down and finally 2 loans got completed. The moment I pay off a loan, I asked my parents to take a letter on bond paper stating this:

1. No legal cases pending on this person – name, address
2. No Loans due for this person – name address.
3. All legal cases are withdrawn and charges payable by the bank.

I have a nice collection of such letters today! . Then as time passed I completed more and more loans slowly. My take-home salary was around Rs 55k at that time. So I decided to pay Rs 40k to default bank per month but that couldn’t help me serve other roles.

Slowing Down

I had slowed down, kind of worn out. I suffered a serious depression at that time. I was earning much but didn’t have money to satisfy myself.

It was cut-to-cut life.

I didn’t know what to do. One of the urban bank due was around Rs 3 lakhs. I managed to arrange Rs 1.5 lakhs over 4 months and paid it, but still it was short of 1.5 lacs, so again I had to run for friends for money, somehow by end of 2010 I was able to clean that loan.

At this particular point, my father made a mistake. Even I made a mistake. I asked my father to go and collect the papers of closure details, he refused to go for some time. After 3-4 months or so, my mum went to the bank (again !) and bank guys said – one more loan pending (which my father didn’t tell me about) + interest of old loan worth 42k !!!!!

Why? Because we changed our bank software and with this new software – a different way of calculating the interests – your due is still 42k !

Freak – one small mistake – refusal to take ownership – cost me 42k !. So back to square one. 3 loan accounts + 1 BRAND NEW loan account from an urban bank and accumulated interest of 42k of old account – this new interest mechanism caused severe attacks on bank guys from villagers nearby as they didn’t understand new interest mechanism and issues with old software – it was kind of news in our region.

I approached the bank and said, I can wipe out quickly if you give me concession (I didn’t have to bother about CIBIL as a loan was on my father’s name). So I convinced them saying I will open FD if you minimize the amount. I paid Rs 2.25 lakhs in several months and took off that bank as well!

This time I collected those wonderful letters saying no legal case, no loan pending etc. This took time till mid of 2011.

At this time I was taking a breather! I thought only one big loan account worth Rs 3+ lakhs is remaining which I can wipe out in 6-7 months minimum. So I buckled up but again unforeseen events occurred around Jan 2011.

My house flooring went down by a few inches, as the house was 27 years old. So I had to spend some Rs 40k to repair it. I thought I will do it later but my sister came for childbirth at our home !!! So Rs 40k for house repair and close to 20k per month for sister’s health n stuff + household. Plan to wipe out the last loan was in vain!

I had to draft something new which would take care of such things (which my insurance doesn’t cover) on run-time. So one day I sat and thought about what all am I supposed to do in the future?

• List came out
• my sister’s delivery charges
• naming ceremony expenses
• future marriage of my other sister and gold expenses
• payout these 2 last loan accounts worth 3+ lakhs
• run my house in hometown
• health expenses.

Clearing Off some loans

So first thing I did was – Rs Arranged 1.5 lakhs cash and paid to one of the bank – that was completely from my salary savings for my MS.

Rs 1 lakh was pending and the interest rate was 17% + many ‘so-called-mistakes’ in statement (EXTRA 5K charges for something, 5k entry by MISTAKE).

I had to stop this payment and make it more worth- traceable- tractable- manageable. I went to HDFC , I have salary account with them – took loan of Rs 1 lakhs with 14% interest (had to fight to reduce that 0.5% – referred them to their own site) and added another Rs 50k into it and wiped out 17% bank and made my loan more manageable.

After so many years I was in control of my salary – but still, two things were worrying me – ULIP and Jeevan Anand . I asked my questions on Jagoinvestor and got clarity on what to do with them and I finally I decided to close them down very soon.

Finally, I was left with a much cleaner state. I had one loan of 2.5 lacs left, which I planned to clear off by paying Rs 40,000 for the next 5 months and also planned to pay 5,000 per month to HDFC for the next few months.

But during this time, my sister’s due date came close and boom ! dangled plan. I realized this would go on and on . I had to make savings for my other sister marriage too. So after thoughtful analysis of one week, many permutation – combinations – opened an RD account – one for sister marriage with 17k per month for 12 months period. Below is a snapshot of how my excel sheet plan looked like

Many people asked me about why Rs 17k, but I had planned for entire one year that what would I do with my money. So I started executing my plan. So took one more risk of saving money when one leg was in fire, other on ice.

Sister got a baby girl

May 2011 – My sister got a baby girl, that role was seeking more money from my salary – medicines, naming ceremony and to end it – awesome fight from my sister’s husband which was leading to divorce – my sister gave birth to a baby child (I named her Maithili – named after Seeta – Seeta’s premarriage name was Maithili).

So one thing goes down other pops up, keeping my toes burning. So I had to concentrate on this thing as well. It cost me hell of money man. The naming ceremony was like Rs 50k – in cash – didn’t opt for loan – I was saving money for my MS, which I gave up. So after this, there was high drama in the family, it kind of slowed me down.

I finally was LOAN FREE

End of 2011, I went ahead, closed my ULIP, Jeevan Anand payments and used that money to close my HDFC – paid preclosure charges, took on loss by ULIP as I couldn’t bear this loan tension anymore.

1st January 2012, as planned, I was loan free.

You won’t believe, I became sick in the first week of Jan – still went to HDFC bank for a preclosure statement – took it by hand as I couldn’t wait for another week. 2012 might be the end of the world for many, for me it was freedom.

Started some Saving!

From Feb 2012 onwards, I started buying 10 grams of gold, saving money into various RD accounts – May 2012, I got engaged by my own expenses – Nov 2012 is marriage. I hold NO LOAN on my head and this is the greatest feeling I ever had.

Now I am using all this experience and helping my other friends who have many loans.

The current situation

Thanks for listening to my debt trap story and how I came out of it. Talking to the current situation today in 2015. Now I am living loan-free, credit-card-free life. I didn’t buy a flat/apartment yet, instead, I saved money and constructed a big house in native. As my job needs relocation, I really didn’t want to get stuck with a property. Also, I worked upon many RD/FD formulas to generate parallel income which can take care of my quarterly needs. Working every month on a savings plan. I have got couple of SIPs recently but apart from this, I am trying to save my 50-60% of salary.

With this my story is complete. I hope others can take some learning’s from my experience.

Important Lessons learned from this debt trap story

Based on this debt trap story, I came up with few learning’s which I could draw for all readers

• If you are deep into the debt trap, don’t randomly start clearing it off, but make a solid plan on paper and try to follow it
• Do not deal with small local banks that are owned by one person or a small local body, there are very high chances of errors and intentional cheating. You might get the loan fast, but the interest rates are very high
• Don’t underestimate the power of interest rates. a 15% or 20% interest rate has a lot of power to keep you in debt for a long period.
• You need to take extreme and bold steps when you are in deep shit. Unless you will take very bold actions, it will become very tough to come out of debt trap
• Focus on increasing your income over time. No matter how much you try to cut down on costs, the real lifesaver will be your increase in income.
• Short cut often leads to long cut when it comes to debt. Almost everyone who is in a big debt trap today started with a small debt at some point of time thinking that it’s manageable, but it’s not the case. As far as you can, try to avoid taking debt for trivial things
• Life will keep surprising you with sudden unexpected events that will keep disturbing your original plans, so better you account for them.
• Social events related expenses can really be a pain if you are already struggling in your financial life, especially if you are dealing with debt. You need to take some tough stand on those expenses if you want a smooth ride
• If you are into a deep debt trap, be mentally ready to see few years fly while you are dealing with it. Plan your future, marriage, education plans keeping that in mind. It will mentally help you to deal with it.

Please share your thoughts after reading this debt trap story!

This article is an experience sharing from a blog reader Anup Ramachandran. He wants to share how he learned from this blog and took some actions in his financial life and made a lot of changes. I hope many people must be taking actions and completing many things in their financial lives.

Anup Sharing On his Actions

I am writing this, to give out my own experiences on financial matters and express my personal views on it. I have been a regular reader of this blog for the past one month now. I got hooked on to the website a few months back when I stumbled upon it while doing a regular Google search on some financial matter. The simplicity of matters explained on the website intrigued me. The lucidity of the language used on the website amazed me as did the content. There’s an old saying, “Give a man a fish, he’ll eat for a day. Teach a man how to fish, he’ll never go hungry”. This is exactly what the website is achieving by spreading the knowledge on financial matters.

To begin with, my introduction. I am Anup Ramachandran, 31 years old & married (no kids as of now). I am a Govt Servant for the past 6 years now and presently based in Pune. I get around 50,000 in hand and save about 40,000 every month because the expenses are very little as a result of the good amount of perks I am getting by virtue of being in Govt service. I feel fortunate to say that my wife is also a Govt servant getting the same amount of salary. All in all, I can say that I am saving much more than what my friends in the same age group are saving.

The pen picture drawn here would give the impression of a person who is financially secure and who would be able to achieve all of his financial goals by the end of his working tenure. How wrong could anyone be? The details being illustrated below will throw more light on the mistakes that I made.

I am not an expert on financial matters. I would consider myself somewhere above a novice, but with keen eyes & ears for personal finance matters. I have made financial mistakes (read blunders) over the years which I realised after having been through this website. I decided to do a self-audit of my financial situation. The results were astounding. Leave aside savings and financial security. I found that my hard-earned money was depleting. I would list out a few “savings” that I had.

1. LIC Policies

I had a few LIC policies, the combined premium of which was around Rs 15,500 and with the assurance that I shall be getting close to 15-20 lakhs over a period of 30 years from now. The risk coverage was Rs 3,50,000 (I do not remember correctly, which is actually a tragedy). I got into this when I was working in Corporate about 8 years back, obviously before I joined the Govt Service. One fine day, I received a mail from the Company Fin Dept saying that we need to submit the tax-saving certificates. During a casual chit-chat with a colleague, got a reference of an insurance agent & within a week I had these policies with me. (I didn’t submit the receipts to the finance dept eventually, which I feel was pathetic on my part)

2. ULIPs.

2 x ULIPs the combined annual premium of which was around Rs 32,000 (22000+10000). The risk coverage was somewhere around 1 lakh (I may be wrong again, as I do not remember. The reason we do not remember these things is because of our skewed sense of fin security & savings. We get into these sorts of things without any planning, with the soul view on the money-back and with very little interest in the coverage being provided)

3. Postal Life Insurance

Took a Postal Life Insurance Policy in my first year in the Army. Monthly premium was Rs 2,075 (Annual: 24,000, let’s assume for simplicity’s sake). The coverage provided was 4 lakhs or so. I had taken this because it covered war risk, which means that even if anything happened to me during any operations, the policy would be honoured. This was more of an emotional decision than a financial decision.

So, my annual cash outflow towards my “savings” could be tabulated as below:

Here I was, with 71,500 being paid towards savings, with the view of securing my future (or so I thought). Combined Insurance cover of below 10 lakhs sounds pathetic, to say the least. And mind you, the amount being paid was quite a hefty one considering that I was paying a little more than 10% of my annual earnings towards these “saving schemes”. There is more money than I contribute towards a Group Insurance policy and other such schemes of the Army, but I am not counting that as they are mandatory and I do not have any control over it. Only policies/schemes figuring in my calculations are the ones that I have gone forward and taken separately.

So after seeing the table above, I questioned myself, was there any other way I could put this money to better use? Armed with a little awareness gained from this website & with the help of a fantastic tool called MS-Excel, I did a few calculations.

Let’s assume that I take term insurance (term of 25 years) of Rs 1 Crore, the premium for which comes to 10,000 annually. I am now left with 61,500 for investing. Let’s assume that I am being ultra-conservative by putting the money year on year into an FD with a minimal return of 7% (for assumption sake. In reality the annual rates are higher for FD). I entered the details in MS-Excel and waited for it to churn out its figures. I figured out that if I parked 61,500 years on year into an FD, at the end of 25th year I would get about Rs 41,00,000, which was a good 10 odd lakhs more than what all my other policies were promising me with their combined effort and that too a good 5 years before them.

Surprising, is all I can say! Mind you a few assumptions made were as follows:

1. Compounded annual interest rate of 7%, which is way below the present market rates. This was done to check the lowest possible assured returns. What I mean is that I found that without putting any additional effort within 25 years I could get 41 lakh rupees, assured. What this essentially means is that with proper planning and careful monitoring I can get returns far beyond that.

2. I have put all my eggs in the same basket (in FD). Diversification will surely provide better results.

3. For simplicity sake I assumed that the annual cash outflow into my savings kitty is constant throughout. In reality with increase in salary I can afford to put more money into this kitty. Let’s say I add 1,000 every year into the contribution. Just a little tweaking and tuning into MS-Excel provides me with the astounding figure of 47,00,000. Six lakhs more than what I would have got with constant contribution every year. Not surprising actually! (Power of compounding, eighth wonder of the world,  ring any bells?)

So, the picture was crystal clear. I was wasting my hard-earned money into junk policies and stupid saving schemes. I had just been diagnosed with ‘LIC Syndrome’, just like millions of my Indian brethren. But the good news was, the diagnosis was timely. Cure was available before this financial cancer ruined my life (and my families’ life too).

I set out to right the wrongs done in my financial past. Here is what I am doing:

• Getting term insurance of 1 Crore.
• Cancellation of all LIC policies, ULIPs & PLI policies.
• I started investing in stock market. I have been lucky that many stocks are available in the market at great valuations at this time. Planning to take the SIP route for investment in MFs too.
• Placing a part of my wife’s salary into DSOP (Defence Service Officers Provident Fund), this is something like a PPF and follows the same interest rate as well. This should take care of the debt portion of my savings.
• We own a flat in Pune on loan (luckily all the decisions made by me were not bad). We plan to clear off the loan in the next 5-10 years’ time, which we feel with our combined effort should not be a problem.

This is just the beginning, I am sure there’s a lot more to be done. But that was just my experience.

I would like to offer a few comments (my own personal view) with regards to personal finance.

1. Income Tax – The moment we hear this, we run helter-skelter to get some policy/scheme to reduce it. It needs to be understood that even with these “schemes”, the tax burden is only reduced, it is not totally removed. So, effectively we block 1,00,000 every year for saving a few thousand rupees. There’s only a limit of 1,00,000 provided under section 80 (c), thereafter it is completely taxable. Most of us, if we do a self-audit, go for an overkill resulting in more than 1,00,000 being blocked in the name of section 80 (c).

My personal view is, we should NOT shy away from paying taxes. The mentality of many people is to avoid taxes, even if they say they are looking to save taxes. Look at it as your contribution towards nation-building. The roads, bridges, schools, educational subsidies, the subsidies that we enjoy on diesel & LPG is all because of the taxes that we pay. There’s a very old saying, “The Army marches on its belly”. I would add to it by saying, “And that belly is filled with the taxes that we pay”.

Let’s look at it another way. For saving a few thousand rupees, we blocked 1,00,000 rupees. What we have done is we have paid the LIC 1,00,000 rupees so that we can save a few thousand rupees from going to the IT Dept. In effect, we have paid 1 Lakh + taxes (after savings) to the govt (LIC & IT Dept are Govt’s own babies, remember?). What could have been done was, pay those extra taxes (and feel happy for your contribution towards your nation), keep the rest of the money in some diversified avenues (as explained very well on this website many times) and feel happy to see the money grow right in front of you?

If that is not convincing enough, here’s another view. How do you think LIC makes money? It collects money from all of us and puts the money in various avenues, a major chunk of it in the stock market. There was a piece of news a few days back that 5% of stocks of Infosys is owned by LIC. There was also an interview of LIC Head on a TV News Channel the other day, in which he said that LIC is planning to put 5,000 crores in equities over some time. These are just a few inputs, if you search for them on the Internet, you can find may more. What this means is that they are making a hefty profit with the money given by us and paying us back pittance (often lesser than the inflation rate, leading to erosion of our hard-earned money). If LIC, our “trusted brand” feels that the money is safe in stocks, then why can’t we ourselves put this money in the equities directly and earn the handsome returns without having to share the profit with LIC and its agents?

2. I am not against LIC – LIC, like any other company, is trying to conduct its business. Unfortunately, we as a nation demand for these kinds of policies/saving schemes. The greatest dichotomy is that we take this under the name of Insurance Policy, but what we end up with is very little Insurance. Just look at term insurance. Despite being the purest form of  Insurance available in the market, there are very few takers for it. Amazing is all I can say!

3. Goal-oriented savings – Many of us are not clear why & what we are saving. We are trying to draw a picture without exactly knowing what it should eventually look like. At the risk of sounding repetitive, as this fact has been explained again and again in this site, I would urge everyone to set financial goals for themselves. That will keep each one of us focussed and usher in some financial discipline.

4. Financial Advisor – I am not canvassing for anyone, but if a person doesn’t feel good with his finances and is not sure what needs to be done, it is would be better to seek some help from a Fin advisor. Think of this way, many of us smoke cigarettes in a year which will eventually cost more than what your Fin advisor will actually charge you. It will be better to be safe than to feel sorry later. Remember, that you are ready to pay the likes of LIC for their shady schemes with the hope that they will provide you financial security? I think that will make the strongest case for employing a fin advisor.

5. My personal view – is that the rampant corruption in the country can be partly (not fully, there are many other factors too!) attributed to these kinds of policies. Let me explain how. I am sure all of us are in agreement when I say that we, as a race, look forward to having more money. I mean, today I want more money than what I had yesterday. With this in mind, we look for avenues where we can multiply our money and find some financial security too. These “saving schemes” are the most prevalent avenues that we find. Not that there aren’t any other avenues, it’s just that they are omnipresent. By parking our money into these schemes, we are living like paupers (with the hope of getting rich someday) and hence feel the pinch for money all the time. On the other side the returns that we get are negative. So over a period, a person realizes that he has got very little money. Imagine a working person burdened with family expenses and with dreams of providing quality education to his children & yearning for a comfortable retired life. How would he feel at this juncture? He feels that his income is not sufficient for his requirements and feels the urge for more money (read greed). Again, that’s just my point of view, you are free to differ.

6. Keep Reading and Educating – Last, but not the least keep reading & educating yourself. What anyone says (even I or a fin advisor, for that matter) may not be taken as Gospel truth. The biggest reason for all of us falling for these shady schemes is because they work with huge numbers. For example, when someone says he will give you fifty lakh rupees after 25 years, we immediately come to attention. What they would not tell you is that after 25 years, what we see as 50 lakhs today will be equal to just 8 lakhs in value terms after 25 years (assuming 7% of inflation every year). One needs to do simple analysis and use tools like NPV & IRR to determine the viability of fin products being sold to him. Emotions need to be avoided while making financial decisions. A little use of that very uncommon thing, popularly called common sense, is all that is required to sail us through.

Thanks to Manish and other bloggers on this website I feel more comfortable with financial matters & in control of my personal finances than ever before in my life. Imagine it took a few centuries for Renaissance in Europe (and the world over eventually) and it just took a fortnight of reading this blog for realizing my personal “financial renaissance”.