¨Empty pockets never held anyone back. Only empty heads and empty hearts can do that.¨
Norman Vincent Peale
Introduction: Optimizing Your Money During Long Term Travel
At the beginning of my days as a full-time, Fifty-Plus Nomad, I did not care about travel-related money issues like currency exchange rates, ATM, and credit card fees. I thought they were a small tedious detail that
I did not merit much attention.
However, when I reviewed my spending patterns after my first year as a Fifty-Plus Nomad, I realized that I had spent almost $3,000 on foreign exchange, credit card, and ATM fees and decided to do something about it.
I have dedicated time and effort to learn all I could about these money-related issues in the eight years since. Along the way, I have made errors, but I have managed to reduce these fees by 90%. It has not been that hard, and it has saved me over $18,000.
I want my fellow Fifty-Plus Nomads to avoid my mistakes. So I have developed several posts to help Fifty-Plus Nomads avoid some common but easily avoidable travel-related money mistakes.
How to Get the Best Currency Exchange Rates
The secret to getting the best foreign exchange rate is to avoid transactions that use the ¨dynamic conversion¨ rate as often as possible. Instead, you will get the best foreign currency conversion rates by making transactions using the modified interbank rate.
Modified Currency Exchange Interbank Rate
The interbank conversion rate is what financial organizations receive when they exchange foreign currencies. You can find the interbank rates in the currency converter section of oanda.com and xe.com.
The modified interbank rate is usually the interbank rate plus a 1-2% commission. The exchange rates for most credit card and ATM transactions are ¨modified interbank rate¨.
In my experience, there is no way a traveler can avoid this 1-2% commission. I thought that a significant transaction would avoid this fee. However, I was wrong. I bought a house in Mexico for 1,500,000 pesos, which at the time (November 2015) was equivalent to a bit over $86,000, according to oanda.com. I wired the $86,000 to the bank and went to close the deal and found that I still owed 15,000 pesos (1% of the purchase price, or nearly $860). Never again will I assume that I can avoid this 1-2% fee!
Dynamic Currency Exchange Rate
The other ordinary exchange rate is a ¨dynamic conversion rate¨. The dynamic conversion rate is charged at exchange kiosks, hotels, or when you allow an ATM to do the exchange conversion. The dynamic conversion rate generally is 7 and 8 percent commission.
Even worse, there are some ATMs like those pictured above that are real rip-offs. These machines charge a seven to fourteen percent commission. You will find these machines near tourist sites throughout Europe and in Mexican beach resorts. (The ATMs in Mexican beach resorts advertise that they disperse US dollars).
In some countries where the currency is weak against the US dollars, you may pay less than seven percent at a currency exchange kiosk or bank. Conversely, if the money is stronger than the US dollar, the dynamic conversion rate can be as much as 10% below the ¨interbank rate¨. (Such was the case in the Eurozone between 2005-2008).
Which Currency Exchange Fees Do You Usually Pay
- ATM withdrawals and credit card purchases overseas usually use the modified interbank rate to determine their foreign exchange rates. Therefore, if you want the best foreign exchange rates use your ATM or credit cards. You will probably not get the best rate usually in cash at a foreign exchange kiosk, hotel, or shop.
- More and more frequently, however, ATMs will give you an option that reads something like: ¨Do you want to accept or to decline the option that the bank makes a currency conversion (from the local currency back to your home currency) for you?¨. Decline this offer. The ATM will show you the withdrawal from your account in your home country’s currency. Unfortunately, if you do the math, you will usually find that the bank is charging you the dynamic exchange rate. (Eight percent less than the interbank rate). Ostensibly, this option seems like an excellent way to avoid a foreign exchange fee (more on this later). However, it is often just a way for the bank to take some of your hard-earned money away from you.
- Do not use any ATMs on the streets in Mexican resort cities or near European tourist sites that have signs that say you can withdraw US dollars. Typically, you will be charged 12-15% additional fees on these withdrawals. (Generally for safety reasons, it is best to use ATMs in a bank anyway). In Europe these ATM are associated with Euronet. Read here for more details.
Avoid Foreign Currency Exchange Fees on ATM and Credit Card Transactions
Many banks will charge a fee, which they call a foreign transaction fee, for international ATM or credit card transactions. This fee is often equivalent to 1) 1-3% of the credit card transaction or the ATM withdrawal amount and/or 2) a fee of $2-5 per transaction. (Some banks charge both).
You can find out these fees on most bank websites. You can also find these fees after you’ve made your first ATM withdrawal or credit card charge by comparing the interbank rate for the transaction with the amount of money withdrawn from your account. (There is a sample of this process in a later post).
Once you have determined the fee, plan your withdrawals so that you minimize the fees. In other words, if the bank charges a $5 fee for each ATM withdrawal, take out the most maximum withdrawals possible in one transaction so that you don’t have to pay $5 each for a bunch of small withdrawals.
Sometimes banks will disclose their foreign conversion fees when you make your ATM withdrawals and credit card purchases, particularly in Europe. Usually, in this case, the fee is three percent. You may want to consider these fees if your credit card or ATM card charges a foreign conversion fee. (As you will see later, there are many ways to avoid these foreign transaction fees).
Avoid ATM Currency Exchange Fees
Sometimes you can even avoid ATM foreign exchange fees altogether by using an ATM at a bank associated with your home bank’s network. (For example, there are no fees for withdrawals at Barclays Bank in the United Kingdom if you have a Bank of America ATM). You can find out which overseas banks are associated with your bank by checking your home bank’s website.
In addition to the foreign exchange fee, you will often pay a fee for withdrawing money from the ATM in the country you are visiting. Usually, this fee is equivalent to around $2-4 per transaction in the local currency. Some ATMs will charge more. The ATM will indicate the fee when you make the transaction.
It is not that easy to find bank accounts that do not charge a foreign exchange fee for ATM withdrawals. Schwab, and a few other financial institutions in the USA and Canada, offer accounts that rebate international ATM fees. Usually, to be eligible for these accounts, you must maintain a high account balance (usually around $25,000). When I tried to sign up for a Schwab account in 2013, they required spending more than half the year in the US.
If you plan to do a lot of traveling, these bank accounts can be a godsend. Check out this post from the Points Guy for details. (Keep in mind, however, that you may still pay an ATM fee to the overseas bank).
While I am not sure if the option still exists, I have a Citibank account that waives ATM fees if I maintain a $25,000 balance or pay a monthly $30 fee. I pay the monthly fee and estimate that it saves me between $50-150 in foreign exchange fees each month when I am traveling a lot. I signed up for this account after receiving a notice from my Citibank/American Airlines credit card. And, besides, I got 30,000 frequent flier miles for signing up for the account.
Avoid Credit Card Currency Exchange Fees
Finding credit card companies that do not charge a foreign exchange fee is relatively easy. Many banks have credit cards available that waive foreign exchange fees. Besides, most credit cards associated with an airline or a hotel (i.e., Chase-United and Citibank-American Airlines cards in the USA) come without a foreign transaction fee.
It is generally not a good idea to make a withdrawal from an ATM with a credit card. Most credit card companies charge foreign exchange fees on these withdrawals and treat the withdrawal like a cash advance. Cash advances come with fees (up to 5%) and high interest rates.
If the bank charges a hefty credit card transaction fee, try to minimize your use of the credit card by withdrawing money from your ATM card. Then, use that money for all but your most significant transactions.
Some Additional Posts About Money
- Lessons From An Express Kidnapping in Puebla, MexicoIn January 2020, I was a victim of an express kidnapping in Puebla, Mexico. I discuss what happened to me and what I learned about travel safety from the incident.
- How Many Taxes, Fees, and Other Charges Do Consumers Pay For Airfare, Hotels, and Other Travel Services?The amount and number of travel taxes, fees, and other charges added to your bill will probably surprise you. Many are hidden and like everything else, taxes keep going up.
- The 3 Reasons Travel Prices Are So Radically Different than Other Products: Perishability, Capital Costs, and Yield ManagementHave you ever wondered why travel products seem to be priced so crazily? Learn the three economic factors that contribute to the pricing of travel products: perishability, high capital costs, and yield management.
- Round the World Tickets 101: Are They Worth the Trouble or Not?Once in my life, I bought a round the world ticket. My experience was favorable but I think the number of times these tickets are useful for most travelers is fairly limited for the reasons outlined in this post.
- Paying More than Locals As a Foreigner: How to Deal with and Avoid ProblemsWhen I was younger being charged more for things than locals used to piss me off. Now I simply acknowledge it as part of traveling in third-world countries. I find the less it bothers me the less I attract aggressive vendors, too.
- Money Safety Tips While TravelingThis post offers a few simple tips to avoid problems with travel safety and money issues while traveling.
- Pros and Cons of Using US Dollars While Traveling AbroadOne of the most pervasive myths about traveling is that everybody wants the US dollar. The fact is most people do not want the dollar. Most of the time when they do want the dollar, you will lose money on the transaction. The few times that people do want the dollar are discussed in this post as well.
- Foreign Exchange Fees: A Guide to Help You Avoid Paying Them UnnecessarilyUnless you are careful, you will spend 7% more on foreign exchange conversion fees than you should. By making a few simple changes, I avoided these fees and saved myself $18,000 during my five-year, round-the-world journey.
- ATM and Credit Card Tips: How to Keep Money Problems from Ruining Your Fifty-Plus Nomad LifestyleHow to avoid problems finding ATMs, using ATMs and credit cards, and making large ATM withdrawals abroad.
- A Guide to Currency Exchange, ATM, and Credit Card Fees Abroad: How to Avoid Getting Ripped OffFind out several useful tips to avoid paying unnecessary foreign currency exchange, ATM, and credit card fees while traveling around the world or living abroad.
- Using Foreign Banknotes and Coins: 3 Tips to Avoid Problems3 simple tips for travelers and expats to avoid problems with foreign coins and banknotes.
- Top 7 Budget Travel Food TipsSome of my favorite food-related experiences were also very inexpensive. Sometimes, modest hole in the walls restaurants, kiosks, and street carts can feature some of the country’s best chefs.