So, What's Money, Anyways?

Most people know that money is coins and paper bills issued by a government. But what exactly is money? What's the difference in a coin and a paper bill? Does it make any difference when a coin is replaced by a note of the same denomination by a government? What is inflation, and why should I care? This short introduction might be beneficial if you are not sure about the answers to some of the above.


So, let's start with the difference in coins and paper bills. A 1 dollar note is made up of 100 cents. So, theoretically (or to some extent practically) there shouldn't be any difference in 1 USD and 100 cents; isn't it? Read on to surprise yourself!


A coin has an inherent value. It's usually made of metal of "some" worth. The £1 coin (British one pound) is currently (as in 2012) worth about 4 pennies (or in other terms, the coin's price is 24 times its metallic value).


A paper bill (also known as currency note), on the other hand, is just like a cheque---a promise to deliver you the "thing" of value on demand/ presentation. A £50 pound sterling note cannot be "compared" in any way to its inherent value.


That's why you can "feel" the difference in the weight of a coin of the same denomination over a period of a few years. It's inflation affecting your coins! Sometimes, government replace paper notes with coins. This usually happens when the cost of printing a banknote exceeds the cost of minting a coin out of metal. Again, inflation at work!


So, what exactly is inflation? Most people think of inflation as the phenomena of rising costs of goods. But it's more than that. Inflation is a tool employed by the government to make money out of thin air. Let's take an example out of government bonds issued in a hypothetical currency


Let's say you buy a government bond for 100 cents and the government promises to pay back 127 cents after a period of 5 years (i.e., an interest of 5% per annum). Further, assume that the government doesn't have enough money to pay you back this promised 5% extra money. What it can easily do is to increase the inflation by the same percentage and give you a whooping 27 cents as interest, which in effect makes no difference to your initial wealth [1].




"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”  - John Maynard Keynes


So, you think that your saving accounts are earning you money? Think again; they are just covering some part of your loss.


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[1] This is, of course, an oversimplification. A government has to go through an awful lot of factors (out of which several are external) before it does something like that.

UK Bank Accounts

Disclaimer: Below is my understanding/ experience of various types of bank accounts available, and is not meant to "advise" you on any kind of investment.

Retail banking in the UK is a lot different from what I was used to in Pakistan. While I covered HSBC Passport account in one of my existing posts, HSBC Passport is a current account nevertheless and the charges are £8 per month. Now, if you are from Pakistan, you might have never heard of "paying" the bank to maintain your account. But it's the norm here in the UK. The more you are willing to pay, the better "type of account" you can get from the bank.

So, I started my hunt for a "savings" account and found that there are too many options!

As part of your HSBC Passport account, HSBC also opens up a Regular Saver account for you as well. Now, this is one of the best saving accounts out there (8% AER/ gross) but unfortunately, if you withdraw any amount from this account, it converts to a Flex Saver account (0.05% or 0.10% AER/ gross). Can you believe that somebody is paying a 0.05% interest which comes to 0.04% after the tax?!! What does it come to per month? 0.003%? So, you put in 1000 pounds and get mere 0.03 a month as interest.

But all is not bleak, there is something known as Cash ISA, and like other banks, HSBC has one to offer as well. If you are interested in saving money in the UK, it's unfortunate if you don't have a Cash ISA account. It's tax free savings but there is an upper limit on how much money you can put into that account; you can save upto £5,340 this tax year. HSBC offers a maximum interest rate of 2.75% on Cash ISA's. Here is a complete list of interest rates on various types of HSBC saving accounts.

Even better it to check Money Supermarket Savings accounts for an excellent comparison.

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Someone, perhaps Martin Lewis himself, left a link to Money Saving Expert which is kind a similar to Money Supermarket but a little more "engaging." The site has an excellent post describing Inflation Linked Savings in plain English.

Free Personal Finance Software for the Rest of Us

I've been maintaining Excel sheets for my personal finance for quite some time. It's simple but leaves me with some manual maintenance here and there. Having learnt about mint.com, I thought that I should give online free finance tools a try.

So, let me first clarify who the "rest of us" are. The segment I am referring to do not live in the US and can't afford Microsoft Money or Quicken, and hence are primarily interested in "freeware" or open source software. A typical user in my mind has more than one bank account (possibly in different currencies); he has some cash in hand (again, possibly a few notes in any other currency lying in his drawer); he has some liabilities in the form of house loan, etc. The purpose of the tool should be to show the current financial position to the user. Requirements can further be elaborated as follows:

1. The software should be (absolutely) free. So, Microsoft Money, Quicken and Money Dance are out.
2. It should support multiple currencies, and should ideally fetch the exchange rates automatically from some central internet server.
3. It should provide support for opening different kinds of asset accounts (bank account, cash in hand, etc.) as well as liability accounts (such as home loan, car loan, etc.).
4. The bank where any accounts are maintained doesn't provide live access to the account statement to these tools. That is, there should be an option to manually do all kind of entries.

Free Online Finance Tools

Unfortunately, mint.com is only for the US people, and wesabe.com no longer exists. Frustrated, I tried both yodlee.com as well as moneytrackin.com, and found several important features missing.

Yodlee's problem is that it's too much focused on "online integration with your bank and credit card companies." The option to create a manual account is hidden deep down (i.e., the usability is poor as if the feature is of extremely low important). Moreover, when you are about to create a new account the currency options are limited to 7-8 different currencies. It fails the criteria test above, and doesn't fit my purpose.

And MoneyTrackin's problem is that it's overly simplistic---e.g., in order to create a liability account (such as home loan), you have to enter the balance in negative. The nice thing about MoneyTrackin' is that it efficiently handles multiple currencies (automatically fetches the exchange rates and shows your dashboard in the base currency). Another bad thing about MoneyTrackin' is that too much space is being utilized by ads.

Despite its shortcomings, if you want an online free personal finance application, MoneyTrackin' comes close.

Free Desktop Personal Finance Tools

Having no luck with online tools I tried GnuCash, Money Manager Ex and Grisbi. Amongst these, Grisbi crashed several times. So, it's out. Money Manager Ex seemed good but it doesn't have the concept of Liability Accounts (loans, etc.). The usability of Money Manager Ex can be improved quite considerably. So, it works but making posting entries into the accounts is extremely cumbersome.

Finally, GnuCash was tried, and it has quite a few interesting things. It wins hands down amongst in free personal finance tools with a minor caveat: it's more than personal finance; it support complete dual entry accounting system. And hence, there is a learning curve here for a novice user.

Drawbacks of GnuCash

GnuCash does have a few flaws that I would like to have fixed. One of them is the download size. It's 62 MB! Secondly, in order to fetch currency exchange rates (or stock quotes) from the Internet, it is further dependent on a Finance::Quote library of Perl. This in short means that you need to download Active Perl (if you are on Windows, which is a 9MB download in itself) and further install Finance::Quote.

My Verdict

GnuCash! Go for it!

What is Debit and Credit in Accounting?

Though simple terms in themselves, the use of "debit" and "credit" can be confusing. This confusion arises because of the way the two terms, debit and credit are used in everyday life: one assumes that if a bank has given me credit in the form of a credit card, the money at my disposal increases, and hence the conclusion that credit means "increase." This is awfully mistaken. Similarly, people think that when a bank debits their accounts, the money in the account decreases, and hence the conclusion that debit means "decrease."

So, if debit is not decrease and credit is not increase, what exactly is debit and credit in accounting?

In actual, there is no one-to-one mapping between debit/ credit and increase/ decrease. The actual affect on an account for a debit or credit entry is dependent on the "type of the account." Certain accounts are considered debit accounts, and others are considered credit accounts.

What are Debit and Credit?

A debit entry in a debit account reflects an increase; on the other hand, a debit entry in a credit account reflects a decrease, and vice versa. For example, cash is a debit account. It's increase is mentioned by a debit entry. When you receive cash, you debit it. When you pay out, you credit cash.

With the above understanding, the only thing you need to know to decide between debit and credit is the type of the account, discussed next:

Rule of Thumb

A general rule of thumb to differentiate between the different types of accounts (Expense, Asset, Dividend, Revenue and Liabilities) is to remember the word "DEAD." It indicates that Debit means increase in Expenses or Assets or Dividends. The rest, Revenue and Liabilities, are credit accounts, and a credit entry in these types of accounts indicates an increase.

Of course, this is not an exhaustive list; one needs to understand nature of each account to classify it as debit or credit.

Understanding the Nature of Accounts

While some say that "memorization usually precedes comprehension," I find it easier to memorize by comprehending at least some part of the puzzle. To comprehend the rules, we have to look at the basic accounting equation:

Assets = Liabilities + Equity

So, first make sure that you

1. Memorize and understand the above equation
2. Understand that in the modern accounting system, each transaction has a debit against a credit and vice versa

So, if one thing increases by a transaction and the other one decreases, it's for sure that both of them are the same type of accounts (either both debit or both credit).

For example, if you pay cash to buy furniture, one account is increasing (asset) and the other one is decreasing (cash). Thus, both of these accounts (cash and furniture) are of the same type (debit type accounts, in actual).

But if both of them increase (or decrease) at the same time then they are opposite type of accounts. For example, if you pay cash to settle some loan (accounts payable) then both accounts have decreased. In this case, cash is a debit account and accounts payable (a liability) is a credit account.

Combine the understanding developed by the two paragraphs above with the DEAD keyword, and hopefully you will never have problem settling transactions.

Useful reference: Principles of Accounting, Chapter 2

It's an awesome free online book. Individual chapters can be downloaded in the form of PDF's. There are exercise questions in the form of filling the blanks, multiple-choice questions as well as detailed working using MS Excel. A must for any one interested in learning basic accounting!

Since I scored miserably in the Finance and Accounting course during my undergraduate program, comments and criticism are highly welcomed to improve the above text.

Income Tax Return Forms 2010

So, September came and went away. The time to file your Income Tax (IT) returns has been extended till 15th October. Traditionally, you download return forms (and wealth statement form as well, if applicable); fill them by hand and submit in person to IT office. However, eFiling has been made possible by Federal Board of Revenue (FBR) for the last few years.

The FBR portal is not bad (considering the overall deteriorating situation of almost everything in Pakistan). The portal allows you to export/ import your data for offline filing via MS Excel; except for one minor problem: several sections of the sheet are protected by a password! Yes, you read it correct. I repeat: the Excel sheets which you have to fill for your Income Tax returns are password protected!

A few weeks ago, there was a letter to the editor on precisely the same topic in Dawn.

If you are using Excel 2007, the menu option to "unprotect" or unlock your sheet is Review -> Changes -> Unprotect Sheet. It will ask you for a password but FBR's website gives you no clue as to what the password is. Fortunately for us, cracking Excel passwords is not hard. There can be many password which can unlock one sheet. In the case of FBR's eFiling Excel sheets, one such password is AABABBABABBW.

A macro to crack Excel passwords in general is provided below (author unknown):

Sub PasswordBreaker()
    'Author unknown
    'Breaks worksheet password protection.
    Dim i As Integer, j As Integer, k As Integer
    Dim l As Integer, m As Integer, n As Integer
    Dim i1 As Integer, i2 As Integer, i3 As Integer
    Dim i4 As Integer, i5 As Integer, i6 As Integer
    On Error Resume Next
    For i = 65 To 66: For j = 65 To 66: For k = 65 To 66
    For l = 65 To 66: For m = 65 To 66: For i1 = 65 To 66
    For i2 = 65 To 66: For i3 = 65 To 66: For i4 = 65 To 66
    For i5 = 65 To 66: For i6 = 65 To 66: For n = 32 To 126
    ActiveSheet.Unprotect Chr(i) & Chr(j) & Chr(k) & _
        Chr(l) & Chr(m) & Chr(i1) & Chr(i2) & Chr(i3) & _
        Chr(i4) & Chr(i5) & Chr(i6) & Chr(n)
    If ActiveSheet.ProtectContents = False Then
        MsgBox "One usable password is " & Chr(i) & Chr(j) & _
            Chr(k) & Chr(l) & Chr(m) & Chr(i1) & Chr(i2) & _
            Chr(i3) & Chr(i4) & Chr(i5) & Chr(i6) & Chr(n)
         Exit Sub
    End If
    Next: Next: Next: Next: Next: Next
    Next: Next: Next: Next: Next: Next
End Sub

Happy filing!

$50 billion scam!

It seems that Double Shah's don't exist only in Pakistan. Our world is very prone to risks: see this $50 billion scam!

Online Stock Trading for KSE

A number of online stock trading options are available to invest in Karachi Stock Exchange (KSE) these days. While AKD Trade might be the best service in this regard, it requires a deposit of Rs. 200K. If you would like to start with a less demanding provider, ClikTrade.com might be a good fit, albeit with low quality of service. You can open up an account with Rs. 50K.

An interesting related site is Pak Stock Exchange, modeled after FOREX.com; it lets you virtually trade in KSE for free!