You will be able to plan a large foreign currency bill paid over several years.
Daniel and Karen's son Ethan has an offer to study in Melbourne. The university's fee letter is clear, and so is the estimate of living costs. What is not clear is what all of it will cost in Singapore dollars, because the bills will arrive in Australian dollars over three years, and nobody knows what the exchange rate will be when each one is due. Karen worked out the total at today's rate, then asked Daniel what would happen if the rate moved, and he had no idea.
A large bill in a foreign currency, paid over years, carries a risk that a holiday does not. This lesson shows how to see the size of that risk and the main ways to manage it.
Here is the family's example, with made-up figures. Tuition is AUD 45,000 a year and living costs are about AUD 25,000 a year, so each year costs AUD 70,000, and three years cost AUD 210,000. At an example rate of S$0.88 per Australian dollar, that is S$184,800.
Now suppose the Australian dollar strengthens by 10% against the Singapore dollar before they pay, to S$0.968. The fees in Australian dollars have not changed, yet the Singapore dollar cost becomes S$203,280. That is S$18,480 more, close to a third of one year's costs, caused entirely by the exchange rate. A 10% move in the other direction would cut the cost to S$166,320.
That is currency risk: the chance that the Singapore dollar cost of something priced in another currency changes because the exchange rate moves. As lesson 6.1, Why exchange rates move, explained, a single currency can swing a long way against the Singapore dollar, even though MAS keeps the Singapore dollar steady against its basket. Over three years, a 10% move is well within what currencies do.
The most common mistake is to treat the conversion as a single bet: wait for a "good" rate, then convert everything at once. If the rate moves the wrong way while you wait, you lose. If you convert at the wrong moment, you lock in a bad rate on the whole amount.
Converting in stages spreads the timing risk. Daniel and Karen could convert each year's costs a few months before they fall due, or convert a fixed amount every month from now until the first fees. They will not get the best rate of the period, but they will not get the worst on everything either. The result is an average of the rates over the period, which is far less of a gamble.
Staging does not remove currency risk. If the Australian dollar strengthens steadily over three years, every stage costs more. What it removes is the risk of one unlucky day deciding the whole cost.
The other approach is to fix the cost by converting early and holding the savings in Australian dollars, for example in a foreign currency deposit, until the bills come due. Once the money is in Australian dollars, the Singapore dollar cost of the fees is settled, whatever happens to the exchange rate.
This has its own trade-offs. The money now carries Australian dollar risk: if the Australian dollar falls, those savings are worth fewer Singapore dollars, and if plans change and Ethan chooses a course in Singapore after all, converting back could lose money. Interest rates on foreign currency deposits differ from Singapore dollar rates. And, as lesson 1.3 of How money works, What SDIC deposit insurance covers and what it does not, showed, foreign currency deposits are outside the deposit insurance scheme.
Many families combine the two: convert part early to fix the first year, and stage the rest.
Paying the fees means sending money abroad, and providers differ a lot. Each one quotes an exchange rate, which includes a margin over the market rate, and a fee. Compare the total Singapore dollar cost of sending the same amount, with the rate and the fee added together.
With made-up quotes for one year's AUD 70,000: a bank quotes S$0.8844 per Australian dollar plus a S$20 fee, a total of S$61,928. A remittance provider quotes S$0.882 plus a S$10 fee, a total of S$61,750. The better rate saves S$168 and the smaller fee another S$10, so S$178 on this one transfer, and over three years the difference adds up.
Before using any provider other than a bank you already use, check that it is licensed by MAS to provide cross-border money transfers. The MAS Financial Institutions Directory on the MAS website lists licensed firms. An unlicensed provider offering a better rate is a risk you do not need.
Daniel and Karen's plan ended up as a short table: when each payment is due, how much in Australian dollars, when they will convert for it and in how many steps, and which provider they will use, and it took them one evening to write. Pick one large foreign currency cost in your own life, whether it is studies, a move or a property deposit abroad, and think through which of these approaches fits it.
Write a conversion plan for one large foreign currency cost, with dates, amounts and the provider you would use.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).