Tom Zachystal is President of International Asset Management providing financial planning and investment advice for Americans living abroad.
When you live abroad, a stronger or weaker dollar can raise your grocery bill, shrink your retirement income or unexpectedly affect the return on your investments. Most Americans living overseas either earn in one currency and spend in another, or earn in one currency but save, invest or have expenses in another. In all these scenarios, there’s a risk of financial loss due to fluctuating currency exchange rates.
Whether you’re working (perhaps remotely as a digital nomad (subscription required)), you’ve relocated abroad permanently or you’ve retired overseas, currency risk management should be part of your financial planning.
Planning For Fluctuating Currency Movements
Currencies fluctuate constantly. If you’re earning, spending and saving in the same currency, it’s fine. But many expats, for example, might be receiving income in U.S. dollars while paying rent in euros or yen, or investing in real estate priced in pesos. This mismatch creates currency risk, as your money’s value can change even if your income or expenses stay the same.
For example:
• If your retirement income is paid in dollars but your day-to-day living expenses are in euros, you’re exposed to every swing in the USD/EUR rate.
• If you buy a home abroad, the property price could increase (or decrease) due to currency movements.
• If your portfolio is in dollars but your future spending will be overseas, the value of your future income will be affected by the strength or weakness of the dollar relative to the currency where you live.
• You may also experience losses each time you send funds across borders, due to fees as well as exchange rate movements.
Currencies often move dramatically in response to political or economic news. A 10% shift isn’t unusual, for example, which might stretch your budget or even blow it up.
While we can’t control currency movements, it is possible to plan for them using modern financial planning software. For example, initially you might use the current exchange rate when planning your budget, but you might also want to model using the average exchange rate from the past few years, and the historically least favorable exchange rate, to see how that would affect your financial plans. This gives you breathing space if currencies move in adverse ways.
It’s also sensible to keep at least three to six months of living expenses in local currency. Some expats choose to invest locally as well as in the U.S., and they draw income from either place depending on the more favorable exchange rates at any given time (or at least they transfer internationally less often).
If you plan to return to the U.S. in the future though, it normally makes sense to keep most of your long-term savings in dollars.
Using Apps And Tools To Stay Informed
Several apps that track exchange rates let you set up alerts and target rates that let you time your international transfers and keep track of large fluctuations. Fluctuations can also provide opportunities to invest in other currencies when they are weaker.
In terms of transferring internationally, specialist currency brokers offer much better exchange rates and lower fees than banks. They can also let you lock in rates, or time transfers when rates are more favorable. Online platforms and multicurrency accounts like Wise also provide cost effective ways to transfer between currencies and cross borders. They may also let you bill clients in different currencies if you have a business that invoices clients in various countries.
Planning Ahead
If you’re planning to buy a house or make a large investment abroad in the next year, it’s sensible to plan ahead. Converting money ahead of time when rates are favorable may save you significant sums compared to making one big transfer at a worse time.
Currencies And Your Investments
For Americans living abroad, keeping your investments in the U.S. often makes sense to keep U.S. tax filing and account reporting simple. The U.S. markets offer numerous options, allowing you to invest and diversify globally without the reporting complexities that come with investing overseas. Nonetheless, if your future spending will be abroad, an investment portfolio heavily weighted to dollar-only investments may not be the best option for you.
As already mentioned, holding investments in different currencies lets you hedge against currency rate fluctuations depreciating the value of your assets relative to the currency in the country where you live— especially if you’ve moved abroad long-term or permanently.
What’s best for you personally, however, depends on your current situation, income sources, investment goals, risk tolerance and long-term plans.
Note also that foreign property, overseas pensions and local business interests may already give you foreign currency exposure. A cross-border financial advisor will help you balance your local investments with your U.S. investments as part of your wider investment strategy and financial plan.
Final Thoughts
Exchange rates affect everything from groceries to retirement. They are constantly moving, and the more international your life is, the more well thought out your currency strategy should be.
Use tools to track currency movements, including setting alerts, and map out your income and expenses by currency, modeling different exchange rates to explore where the risks are. It’s also wise to hold enough local currency reserve to cover near-term needs and contingencies. When you’re transferring internationally, consider using multicurrency accounts and platforms for everyday transfers, and work with a currency specialist to strategize larger international transfers. Lastly, align your investment plans with your future spending currencies and long-term plans.
Working with a cross-border financial advisor (like those at my company, though you have many options in this space) lets you integrate currency risk management into your overall financial and investment strategies and align them with your plans and goals. Currency is just one part of cross-border financial planning, but it affects everything.
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