Why you should hang on to leftover currency after a vacation

Why you should hang on to leftover currency after a vacation?

Planning for holidays can be as frustrating as it is exciting, in that we will spend as much of this time coming up with fantastic ideas for trips and projects as we do cutting back on these plans because we realize that they are financially unobtainable. 

While it’s true that there will always be some trips and adventures that will remain outside of our budgets for the near term, there is always a way to work towards a financial objective by planning ahead, and managing our lifestyles to ensure effective savings. This can be accomplished by taking measures to blend our vacations together by hanging on to any leftover currencies that we have after a trip is done.

Not many people realize just how major a cost currency exchange expenses can be when planning a vacation. By the time we exchange funds one way for the destination, and then back again when we’ve returned, it can cost as much as 10% in commission to complete the transaction. This means that we are putting 10% of our entire travel budget at risk just to have access to the appropriate currency type, and then losing another 10% against any funds that we bring back.

Think about it, this means that saving up our foreign currencies for the next trip saves us 10% in costs for the initial exchange! Even if the currency depreciates over the next few years, we will still be ahead by hanging on to those funds and using them again later. From there, we can put these funds into a savings account, and look at the various outlook scenarios to make sure that our investment is protected.

The first risk associated with holding foreign currencies from a previous vacation is that the currencies will dramatically decline in value. Supposing our currency exchange commission is 5%, we want to make sure that the prices don’t change in a way that would exceed the 5% transaction cost. So long as the dollar amount of the funds is greater than $1000, we can protect ourselves from this currency risk by taking out an opposite transaction through a stock broker. 

By short-selling the foreign currency, for example, we will have hedged the position 1-for-1 against deflation risk, and will therefore maintain the value of the currency against its transaction cost.

The second risk associated with holding foreign funds is that they would not earn as much of a return on their investment as if we had changed them back into domestic funds. For example, if a domestic savings account is paying 3%, it is worth our time to exchange the funds back to domestic currency if the commission is less than 3% because we will make up the difference through the interest earned. 

The trick to evaluating this difference is to look at the difference between the amount that could be earned through a foreign savings product, versus a domestic one, and factor in the commission as a fixed upfront cost.

This essentially means that a domestic investment or savings product must outperform both the foreign savings rate and the investment commission (the commission then being divided out by the number of years over which the savings account will be held). 

This also demonstrates how it is that holding the foreign funds in a savings bond might also be of benefit because the required rate of return is much smaller when put into perspective against our vacation goal. 

Since the funds are already serving a goal by not costing us a conversion commission, the interest returns on a foreign currency savings deposit simply magnify the benefit by the amount of excess beyond the opportunity cost.

The final result of all of these factors is that we should be able to base our decision about whether or not to convert foreign currencies from a vacation back into domestic funds on the currency commission costs, weighted against the expected currency fluctuations coming in the market, and the difference between foreign and domestic savings rates. 

So long as the foreign currency does not depreciate by so much that it exceeds the costs of the exchange and the interest earned on a domestic savings account, we are much better off simply hanging on to that loose change until we are ready for another trip.