Produce a cost plan for one real expense in a foreign currency, including fees and a range of exchange rates.
Write down one cost you will have to pay in a foreign currency within the next year or two. Next to it, put two figures: how much it is in that currency, and the date you must pay. If you will pay in instalments, give every instalment its own line and its own date. The rate table, the fee comparison and the conversion rule you build later all use these figures, so record them before anything else.
A holiday fits, and so do university fees, a deposit on an overseas course, a deposit on a property, or money you send to family abroad on a regular basis. Pick something you really will pay. The plan helps most when the sum is big enough for a change in the exchange rate to change your budget.
Siti (an invented example, with invented figures throughout) lives in Singapore. She has already booked her flights for two weeks in Japan next spring. She knows roughly how many yen she needs for hotels, meals and rail passes, but she has no Singapore dollar figure she trusts. Last year she changed all her money the week before she left, at whatever rate the money changer was showing. She also put half the trip on a card without looking at what it charged. This time she wants a range for the cost before she goes, and she wants her conversion method settled before a rate starts to look tempting.
Her cost is 400,000 yen, to be spent over two weeks in April. Those two facts sit at the top of her page.
Look up today's rate and express it as Singapore dollars for each unit of the other currency. For the yen and similar currencies, quote it per 100 units instead. In this form, a better rate is one where you pay fewer Singapore dollars per unit, and a worse rate means paying more.
Take today's rate and produce four others from it: multiply by 0.95 (5% better), 0.90 (10% better), 1.05 (5% worse) and 1.10 (10% worse). Then work out what your cost comes to at each of the five.
Siti starts from S$0.90 per 100 yen. Since 400,000 yen is 4,000 lots of 100 yen, she multiplies each rate by 4,000 to get the cost:
At S$0.81 per 100 yen (10% better): S$3,240 At S$0.855 per 100 yen (5% better): S$3,420 At S$0.90 per 100 yen (today): S$3,600 At S$0.945 per 100 yen (5% worse): S$3,780 At S$0.99 per 100 yen (10% worse): S$3,960
From the cheapest result to the dearest is S$3,960 less S$3,240, or S$720. The distance between your best and worst case, stated in dollars, is your currency risk. Lesson 6.1, "Why exchange rates move", explained that one currency moving roughly 10% either way over a few months is entirely possible, so Siti should treat the full spread as something that could happen. A tuition bill paid across several years would carry a far wider range. Lesson 6.3, "Paying for overseas studies or a move in another currency", deals with that case.
The way you pay carries its own cost on top of the exchange rate, and each method charges it differently. With a card, your card issuing bank converts the purchase into Singapore dollars, and MoneySense notes that the rate used can vary from day to day and from bank to bank. The card company, such as Mastercard or Visa, also charges your bank an international transaction fee, so check your card's terms to see what you will pay. A money changer or a multi-currency account charges you through the rate it quotes. A transfer provider uses its rate and also charges the fee it quotes. Fees differ from one provider to the next, so read each one's current terms. Lesson 6.2, "Holidays and overseas spending: fees, DCC and timing", lists what to compare between methods.
Choose one other method and cost it in exactly the same way as your first choice, at today's rate.
Siti had planned to use her credit card. Its fee is 3%, which puts S$108 on top of S$3,600 and brings her to S$3,708. She compares a multi-currency account quoting S$0.902 per 100 yen and charging nothing for spending, which comes to S$3,608. Choosing the account saves her about S$100.
Treat these two kinds of cost separately. Once you pick the cheaper method, the fee difference is a saving you are certain to get. The exchange-rate range works differently. Converting in stages spreads it, but nothing removes it.
A conversion rule is one or two sentences, written ahead of time, that say how you will convert your money. Having it on paper stops you from putting off conversion while you hope for a better rate. The rule should say how many conversions you will make, when each one happens, and what, if anything, would make you change it.
For a holiday, two or three conversions spread over the months before you leave are plenty. When a large bill is paid over a number of years, plan a conversion ahead of each payment and think about fixing part of the sum early, as Lesson 6.3 describes. Lesson 6.2 also gives a rule that applies whatever you are paying for: if a terminal offers DCC, choose to pay in the local currency.
Siti writes hers as follows. She will convert the 400,000 yen in three equal amounts, at the start of January, February and March, using the multi-currency account. She will not hold off for a better rate. If a terminal shows her DCC, she will pay in yen.
Arrange the plan in four blocks running down one page. The top block holds the cost in the foreign currency and its payment date or dates. Below it come five rows, each pairing a rate with the Singapore dollar cost at that rate, with a note of the range between best and worst. The third block shows the fees for the method you have chosen and for one alternative, with each total at today's rate. The last block is your conversion rule, written as something you have committed to do.
Siti's page tells her the trip will cost about S$3,240 to S$3,960 plus small fees, with S$3,600 in the middle, and it sets out exactly what she will do and when.
Choose your own cost, find today's rate, and start building your page.
Fill in the foreign currency cost plan with five exchange rate scenarios, the total fees and your written conversion rule.
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