Converting Currency When You are Traveling

Having just returned from London and Brussels, my wife and I put a lot of thought into how we would manage our spending while overseas. The good news is that today there are a lot of options for people who expect to travel frequently. On the other hand, it’s pretty easy to pay exorbitant commissions if you aren’t paying attention. So what are the most efficient ways to put local currency in your pocket while you’re travelling?

moneyThe first thing to understand is that whatever the rate quoted in the Wall Street Journal or Yahoo Finance might be, it’s difficult to get that rate. That’s basically the institutional rate that currency dealers and banks might be able to obtain for large transactions. Obviously, a retail transaction will probably cost more.

Foreign Exchange Booths.

We’ve all seen them as we go about town, even here in San Diego. The rule of thumb is that you pay for convenience – and it is as true in foreign exchange as it is at Seven Eleven. I compared the online quoted rates for several currencies with the exchange rates on Travelex, one of the popular currency exchange operators. On May 21, 2014, the quoted exchange rate on Yahoo for buying Euros was $1.3687, meaning it costs about $1.37 for every €1.00. The cost to buy €1.00 Euro through Travelex was $1.52, an 11% premium over the institutional rate. Less commonly exchanged currencies like the Jordanian Dinar are even more expensive.

Your Bank.

Many larger U.S. banks will exchange currency for their customers. Some may charge a shipping fee or other convenience fees. That said, if you want to land on the ground in your destination with local currency in your pocket, I’ve found that this costs about half of buying the currency at the exchange booths. For example, purchasing €1.00 Euro from Wells Fargo cost $1.4421. This adds up to real money; to buy €1,000 cost you about $75 more from Travelex than it would to get the same currency from your bank, especially if you can do it without other fees.

ATM Machines.

Once you have arrived at your destination, you can hit an ATM for local currency. The costs here will vary depending on your bank, what kind of card you have and a host of other factors. We found that using our Wells Fargo Travel ATM card did not carry currency conversion fees, but the non-bank ATM charge was $5 per transaction, meaning that a £160 ($268) withdrawal in London from one of the local banks cost about 2%. This is much cheaper than the 15-30% interest rates charged by credit cards for cash advances or the high conversion cost of using the currency booth.

Credit Cards.

The best exchange rates will usually be on your ATM or credit card, especially if you have a card designed for travel. I’ve seen foreign transaction fees ranging from 0-3%, but this convenience may be offset by annual fees or higher interest rates on carried balances and cash advances. Still, when your hotel bill is several hundred or thousands of dollars, this can make a huge difference. For our trip, the foreign exchange fee on our Citibank card was 0%, our USAA Reward MasterCard was 1% and American Express was about 2.7%.

Our travel strategy was to hit the ground with about $100 in local currency – enough to get a meal in the airport or catch a taxi if we needed it. We used our credit cards for big purchases and we tried to do a couple of big ATM transactions to reduce the impact of that $5 non-bank fee.

A little planning and research saved us a LOT of money that we could spend on Belgian chocolates and beer. By planning ahead, you can save a lot, too. Happy Travels!

About Rick Brooks

Rick Brooks, CFA®, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Investment Officer. He is a lead advisor, counseling clients on all aspects of personal financial management. Rick serves on several boards. He is the Chairman of the Board of Girl Scouts San Diego, and also chairs the San Diego Foundation’s Professional Advisor Council. Rick and his family live in Mission Hills. Rick enjoys spending time with his family, theater, cooking, skiing, gaming and reading.

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