At orientation before I left for Japan someone asked a question about the exchange rate between Japan and the U.S. The person who answered the question said that we – the people leaving for Japan – were lucky since the yen was doing so well against the dollar. I politely smiled and nodded my head in approval because I had no idea how exchange rates worked and could’ve cared less. I had heard from most American media outlets that the dollar was “weak”, but I had no idea what this meant and didn’t realize how much it could affect my income.
It turns out, a weak dollar is a huge gain for any American working abroad in Europe, Asia, and other places. Just how much of a gain?
Let’s take a look at how a moderate salary of $35,000 – or approximately 3,500,000 yen – is effected by the exchange rate.
- August 28, 2008: $1 = 109.56 yen
- August 28,2009: $1 = 93.55 yen
A sixteen yen difference over one year doesn’t seem too dramatic. However, when you do the math it is apparent that exchange rates are more important than I initially thought.
- 3,500,000 yen @ 109.56 = $31,945.96
- 3,500,000 yen @ 93.55 = $37,413.15
It comes out to a difference of $5,467.19, or 17%!
Right now my ING Direct savings account is getting 1.4% so these numbers are pretty staggering, but what’s the next step? How do you make the exchange rate work for you?
Let Speculation Be Speculation
Much like timing the stock market, anticipating exchange rates is a loser’s game. Forces like GDP, inflation, and employment affect the currency rate and the average person doesn’t have the ability or information to predict which way a currency is headed.
The chart below shows the relationship between the yen and dollar over the past ten years. As you can see, there is no pattern and trying to anticipate one way or another could cost you thousands and make you go gray by thirty.
Instead, use the investing technique of dollar-cost averaging to protect your money. By sending equal amounts of money home, say once a month, you’ll be able to gain money when the exchange rate is in your favor; but you won’t lose as much when it’s not, because you won’t be sending that much money home. This technique won’t allow you to maximize your earning potential, but you’ll have peace of mind knowing you won’t be on the losing end of a 17% change.
Exchange rates are one of the fascinating aspects of money, but it’s best to leave their intricacies to computers and be safe with your money when abroad.
Photo: yahoo.com
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Aww… I was hoping you’d go into a little more detail on things if you have an economist background, but if you just got here a little bit ago then I guess you really haven’t given things much thought yet. Some other factors to throw into the mix:
Interest rates have been essentially 0 in Japan for as long as I’ve been here, so if you earn any interest on anything back home then it needs to be taken into account when considering whether to wire money or not.
If you’re a gambling (wo)man or think you can read the market well enough, you can make (or lose) money dabbling in forex – if you do a search then a bunch of different engines will come up for day trading. It’s sorta fun, I tried one of their free trials.
Once you have a good idea of what good and bad rates are, I find that personally it’s better for me to save up money and send it home in bigger chunks, say once every 3-4 months, to save on fees as opposed to every month. If the rates suck, wait til next month unless you really, really have to (ie: not enough to cover this month’s student loan, etc.). Recently the rates have been consistently good so it doesn’t really matter as much, but still the wiring fee adds up if you’re sending every month.
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Austin Reply:
November 7th, 2009 at 5:48 pm
I think you hit it on the nose with sending money back every 3-4 months. Those fees add up quick and I think a lot of people don’t even pay attention to how much their losing every month by doing so. It all depends on your situation and money needs back home, but you will definitely optimize your money by sending back big chunks compared to every month.
As far as forex goes, I’m not a big believer. I’ve never looked into it, but it seems like too much speculation and guessing to suit my interest. If you’re doing it as a leisure activity and not losing your paycheck over it, that’s fine. But I worry that people lose tons of money – just like picking stocks – while they’re busy looking for the big payout.
Thanks for the comment, Darg!
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Oh yeah, and also wiring rates differ by how you do it- your bank vs. Go Lloyd’s vs. postal wire, etc… check out your options, but those latter 2 tend to be the best. Which is better depends on the amount you’re sending, I believe.
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No way am I sending any money back to the states. The reasons are far too pedantic to go into, in a comment section. However, the US dollar is toast. At the very least keep your funds in foreign dollar Shinsei bank account
http://www.shinseibank.com/
(excellent English support/site).
You can keep your funds in a foreign dollar account of your choosing, or foreign currency denominated term deposit, earning a small bit of interest (better than nothing).
The AUD or CAD still looks like a good bet to me. Do not put your money in USD. You will lose value, as the Fed continues to inflate, and the US continues to slide. There is nothing propping up the dollar, and the world is starting to clue in.
Further details/education http://www.financialsense.com
I even hold a bit of gold, which I don’t recommend for people that still have debt. It is a good hedge against a falling dollar.
‘Nuff said. You’ve been warned.
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That chart shows the relationship between AUD/USD, not JPY/USD.
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Austin Reply:
November 9th, 2009 at 7:34 pm
Oops! Should be fixed soon, thanks!
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My daughter is now living & working in the UK. She has a UK checking account but we were advised that she should maintain savings & investments in U.S. accounts. Can you tell me the best way for her to send us money to invest in her U.S. accounts? Thank you.
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Austin Reply:
February 26th, 2010 at 11:07 am
I would suggest talking to her bank and seeing if they can initiate a transfer to her home bank. They should be able to and it’ll probably be less than $25 to make the transfer.
There are some other options to explore, but they’ll probably save here less than $10 and just be a hassle.
Good luck!
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