You will produce a cost plan for one real foreign currency expense, with fees and a range of exchange rates.
Siti has booked flights for a two-week trip to Japan next spring, and she has a budget in yen for hotels, food and rail passes. What she does not have is a budget in Singapore dollars she can trust. Last year she converted everything the week before she flew, at whatever rate the money changer had that day, and paid for half the trip on a card without checking its fees. This year she wants to know her cost in advance, within a range, and decide her conversion plan before the rate starts tempting her.
This exercise builds that plan for one real foreign currency cost of your own, from choosing the cost to writing the rule you will follow. Siti's trip is the worked example, with made-up figures.
Pick one foreign currency expense you will actually face in the next year or two. A holiday works, and so do university fees, a deposit for an overseas course, a property deposit or a regular remittance to family abroad. The plan is most useful for something large enough that a currency move would change your budget.
Write down the amount in the foreign currency and when you will need to pay it. If it is paid in instalments, note each one.
Siti's cost is 400,000 yen, spent during two weeks in April.
Find today's rate, written as Singapore dollars per unit of the foreign currency or per 100 units for currencies like the yen. Then work out four more rates: 5% and 10% better, and 5% and 10% worse. A better rate means fewer Singapore dollars per unit, so multiply today's rate by 0.95 and 0.90. A worse rate means more, so multiply by 1.05 and 1.10.
Price the cost at each of the five rates.
Siti's rate today, in the example, is S$0.90 per 100 yen. Her five scenarios:
10% better, S$0.81 per 100 yen: S$3,240. 5% better, S$0.855: S$3,420. Today, S$0.90: S$3,600. 5% worse, S$0.945: S$3,780. 10% worse, S$0.99: S$3,960.
The range from best to worst is S$720. That is the currency risk on this trip, shown as money. As lesson 6.1, Why exchange rates move, explained, a move of that size in a single currency over a few months is entirely possible. For a tuition bill over several years, as in lesson 6.3, Paying for overseas studies or a move in another currency, the range would be far wider.
Next, work out what your chosen way of paying adds on top. Use the comparison from lesson 6.2, Holidays and overseas spending: fees, DCC and timing: the card network rate plus the bank's foreign transaction fee, or the rate a money changer or multi-currency account offers, or the rate and fee a transfer provider quotes. Check the actual fees in each provider's current terms.
Then price one alternative the same way.
Siti's first plan was to use her credit card. In the example its fee is 3%, which on S$3,600 adds S$108, making S$3,708 at today's rate. Her alternative is a multi-currency account that converts at S$0.902 per 100 yen with no spending fee, which costs S$3,608 at today's rate. The alternative saves about S$100.
Notice the sizes. The fee difference of about S$100 is a sure saving. The currency range of S$720 is a risk she can spread but not remove.
Now decide when and in how many steps you will convert, and write it down as a rule, in one or two sentences. A rule decided now protects you from the temptation to keep waiting for a better rate.
A good rule says how many steps, when each happens, and what, if anything, would make you change it. For a holiday, two or three conversions in the months before departure are enough. For a large bill over years, stage conversions ahead of each payment, and consider fixing part early, as lesson 6.3 described.
Siti wrote: "I will convert 400,000 yen in three equal parts, at the start of January, February and March, through the multi-currency account. I will not wait for a better rate. If I see DCC on a terminal, I pay in yen."
One page. The cost in foreign currency and the payment dates. A five-row table with each rate and the Singapore dollar cost. The fees for your chosen method and one alternative, with the total at today's rate for both. Then your conversion rule, written as a commitment.
Siti's plan tells her that her trip will cost somewhere between about S$3,240 and S$3,960 plus small fees, with S$3,600 as her central figure, and it tells her exactly what to do and when. Choose your own cost, find today's rate, and start building your page.
Complete the foreign currency cost plan with five exchange rate scenarios, total fees and a written conversion rule.
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