Please subscribe to my YouTube channel @MoneyWithJames
#Money #Education #StockMarket #RealEstate #Learning #Finance #Investing #Learn #Wealth
Hello! Welcome!
Ever wondered why converting money to another currency just feels like you are getting screwed, especially when you travel?
And why currency exchange shops, or even your own bank, say it’s zero commission or zero fee but the conversion still doesn’t add up or seem quite right?
Today I’m going to explain how to avoid some of the common foreign currency conversion traps, to help make your travel money stay in your pocket rather than in your bank’s or currency conversion place’s pocket!
So let’s get into it.
So many of us have been there, we are super excited for a trip overseas and dash off to the airport and then last minute we think, whoops, we ought to convert some money, so then we will have local cash in our pocket ready for arrival. So we check in to our flight, drop our bags and wander over to the currency exchange desk at the airport and ask them to convert some cash for us. They say sure, it is zero fee. We think what a result! And convert something to have on hand. We walk away thinking we have nailed it. Then just curiously double check the rate online and notice somehow 5% or 10% or even 20% of our money has disappeared somewhere. What the heck!?
So what happened? Sadly the rate the currency exchange shop gave you is not the current rate (otherwise known as the spot rate) and it was padded with a juicy fat spread otherwise known as their profit margin! Meaning they buy your currency at a lower rate than is fair value. Then if you immediately turned around and sell it back to them they would buy it back at a lower rate. Thereby taking some commission or a fee when buying and selling which also means they are creating a spread. You could argue they kind of need to do this to pay for staff and the hefty rent of having a shop in the airport, as they need to cover their overheads (including, securely storing and transporting cash in armoured trucks, and most importantly buying in and holding all those various foreign currencies so they can give them to you – foreign cash is their product). But sadly this means you are paying for all of this and do you really need to? In the modern technologically advanced and connected world today, I suggest not!
On the other hand, perhaps you live in country with a globally recognised currency, like the almighty USD, and you are one of those organised types that plans ahead and folds up all your clothes perfectly a week before your trip and therefore taking all your spending money with you in cash is your preferred approach, is that you? If you know, you know.
So these organised types take all the cash they plan to spend while vacationing in an envelope and will convert it while they’re away. Go on, raise your hand if that’s you. Perhaps you heard that you get a better rate if you convert once you arrive at your destination?
Well let me share a quick personal story, I remember about 6 years ago some good friends from Australia flew all 20 hours or so to Europe to travel around Spain and I met them there. One of my oldest friends did exactly this. He brought thousands, I can’t remember exactly how much but, roughly $5,000 Australian dollars (so about $3,500 US dollars), with him in an envelope hoping he would get a better rate in Spain. Maybe a great idea right? No! Heck no! This is not a good idea. You can easily lose the cash or get robbed carrying it around or hiding it in your hotel room. Even travellers cheques, what your parents may have used carry similar risks. Most of all, the biggest problem with this strategy is whichever country you are vacationing in probably does not want/need your currency so they have to sell it back to your country and therefore they need to factor in a cost for doing so. So you know what exchange rate my friend was being offered in Barcelona. The currency exchange shops were taking around 15-20% from the actual rate of Euro to Aussie. Ridiculous! So I told him to scrap that horrendous idea and take his hard-earned cash back home. I will withdraw Euros from my bank account and get charged about 2-3% conversion from my bank and we will work out the conversion for him separately. It felt like he was being robbed giving away nearly 20% in a bad rate.
So what can you do instead? How can you avoid getting screwed and maximise your travel money? Well firstly, as I have hinted, you can simply use your own bank to withdraw cash at an ATM/cash point in almost any country you arrive in. They are typically available inside the airport terminal on arrival. This is the simplest option for most people and often far safer and cheaper than taking your own cash or getting cash converted at the airport. Most banks say they are zero commission but that’s nonsense, as they actually charge you around 3% inside their juicy-fat spread.
What else can you do? And what do I recommend for my friends and family? Well as I started this channel a month ago I mentioned my nephew, check out my very first video/post, had recently moved abroad and asked me about this very issue, as he is going to have significant foreign currency expenses over an extended period of time and therefore he wanted to minimise losing money on conversions, as much as possible anyway. So what did I recommend? I suggested a Wise card. Now this video/post is not sponsored by Wise but it’s a brand and solution to this problem that I have found very useful and I have personally used for many years. I will include my referral link in the description below for those wishing to get a card set up and also help support my little fledgling channel in some way. Thank you. So what does a Wise card do? Simply put, it acts as an online bank account. You get a card with a 16-digit number just like a credit card has, so it is accepted as at all places where credit cards are accepted. Although it is not a credit card, as there is no credit, instead you transfer your own money over to it like a normal bank account and when you purchase something or withdraw cash at an ATM/cash point anywhere in the world you are withdrawing your own money. No credit.
You can of course use it as your everyday bank account at home but the real magic happens when you are overseas or wish to transact in a currency which is not your own. Say you live in the US and therefore put USD into your newly created Wise account. When you travel to Mexico or Europe you will need to sell your USD and buy Mexican Peso or Euros. With the Wise card you can do this in advance of your trip so then you hold a balance of the foreign currency you need in your Wise account ready for some tasty margaritas or French croissants that is the correct pronunciation folks. Or if you do not convert in advance of when you need to you can simply purchase using your Wise card (or even digital payments like Apple Pay, Google Pay, etc. as that’s easy to set up as well) and Wise will do an FX conversion for you in that moment – boom.
So what do I do? How do I use my Wise card? Personally, when I book a trip away or know I have an upcoming expense in a foreign currency I take a quick look at the charts. I check where is the currency pair currently at compared to the prior month and 6/12 months? Is it good value today or not? Then pending how it looks I convert some money just to get ready or if it looks cheap I convert enough to cover the entire trip/expense immediately, but if it does not look so cheap I set alerts or levels in Wise to convert automatically when my target rate is hit over the coming days/weeks prior to the trip/expense. Now worth mentioning…Wise still charge a fee for converting but it is as little as 0.33% and up but typically under 1% it just depends which currency pair.
So why do I use Wise? Some of the lowest conversion fees available and you can far more easily get a good rate by timing your conversion – from the comfort of your own home by setting alerts/auto conversion levels and then averaging your rate over a longer period of time. Of course, you can not get so lucky to time the best levels every time…but you are more likely to get a better average rate if you commit a little effort. Although most importantly, you will reduce your fees by using a dedicated low cost provider like Wise to cut down your fees and narrow your spread and that is the only thing you can really control. What other hacks do I use? I often use the XE.com app on my phone for alerts as Wise does not support auto-conversion levels for every currency pair as yet.
Additionally, if like me, you really love economics and markets you can get really into the details if you wish and wait for economic data like inflation or retail sales or the biggest influence affecting currencies is interest rate decisions from central banks. That said, generally it is safer to just pick a few good levels and average your conversion based on how the currency pair looks compared to the prior month or so. Although, if you have a very large expense then it’s good to check if an interest rate decision is due over the coming weeks because that will almost certainly have the greatest impact on the FX so it may be wise to convert some currency ahead of that interest rate decision in case it is an unexpected change – unless you want to take a chance on picking the right side!
Also, another feature for Wise as far as I understand is you can use it to convert and send foreign currency to friends/family all over the world. It’s not a feature I use but that’s a great use-case in itself.
Finally, one important thing to remember, which is somewhat obvious. The larger the amount you are converting the more important it is to focus on lowering the percentage-fees – whether that is a wide spread (an artificial percentage fee) or an actual percentage conversion fee. As this is what adds up and costs you the most as your conversion amount increases. In most cases waiting for a few weeks to get a better conversion rate will only gain you 1-2% of careful timing and a bit of luck but choosing the correct platform to do the conversion can reduce your spread and conversion fees by 3% or more quite easily. So this is the key message today, as Wise allows you to reduce both types of fees.
I do have one more hack for those wishing to convert tens of thousands or much more but I can provide my hacks for much larger currency conversions in another video/post! So comment below if you wish to see that soon!
Leave a Reply