Living abroad is an adventure filled with new experiences, cultures, and opportunities. But when it comes to managing your money, things can get a bit complicated. Currency isn’t just the cash in your wallet—it’s the lifeblood of an expat, influencing everything from daily spending to retirement planning.

It presents some frictions and complexity, but it’s important to understand so your risks can be managed, while costs kept down. When done right, currency management becomes a tool, rather than an obstacle, making the world feel more borderless than ever.

Most personal finance advice websites hardly ever touch the topic of managing your finances in multiple currencies, so we thought we should!

Here is how being an expat impacts your personal finance management:

Purchasing Power

The most obvious way that currency plays a role is the difference in currency strength between your home country and the one you’re living in.

At the end of 2020, it was around 103 Yen to the Dollar. Just a few years on, this peaked at 160. This means that your USD income has almost 60% more purchasing power when traveling to Japan. Or, in other words, a ~60% pay rise out of thin air. Suddenly, Tokyo is looking cheap.

The math isn’t always this straightforward because domestic inflation comes into it (i.e., USD-LIRA went from 7 to 34 in the same time period, but local Turkish prices have also risen dramatically). In the case of Japan, who has had significantly less inflation than the US, this “pay rise” absolutely is the reality. In fact, it’s a higher “pay rise” than it appears at first glance.

Deciding where to lay your hat based on future currency strength isn’t wise, but looking at today’s differentials is an important part of making your money go further.

Foreign Income

Volatile Exchange Rates

Whether it’s from retirement or working remotely, many expats receive income in a different currency to the one they’re residing in. As a result, they’re at the mercy of drastic currency fluctuations.

Retired Argentinians who receive Pesos but live abroad will likely be experiencing not only a steady decline in purchasing power, but drastic daily volatility from the local politics.

Hedging

To combat this volatility, the hedging practices showcased over at Top Money Compare can mean flattening this curve. By using forward contracts, you can lock in future exchanges at pre-agreed rates to protect against your income’s currency devaluing relative to the one you reside in. If you’re less certain about your income (and therefore may not want to commit to a forward contract), then option contracts let you opt-out of them if need be.

Exchange Fees

Perhaps more pertinently, constantly having to exchange money in and of itself can add up in fees and hidden spreads. The best way to combat this is to use a provider that promises no or low fees/spread. As a rule of thumb, high street banks are your worst option, while modern fintechs are better suited to fast, cheap transfers. Plus, they’re a lot more user-friendly.

Another consideration here is multi-currency accounts. Top Money Compare shows that by being able to hold various currencies at once, you can avoid exchanging money altogether which can help cut down on fees.

Taxes and Mortgages

Currency can present some complexities when it comes to filing taxes and applying for mortgages. With taxes, swings in currency can raise or reduce your liabilities, as well as present a difficult bookkeeping challenge. Whether you’re filing taxes in various countries or dealing with multi-currency accounts in one country, a professional accountant is worth the money.

When it comes to buying a home, having foreign income again presents a problem. Lenders are not only wary of income that isn’t denominated in the local asset’s currency (your currency risk is their currency risk), but it can also introduce other risk factors too, such as concerns around money laundering.

Although applying for a mortgage is certainly common with foreign income, it reaffirms the need for an accountant. Having your books verified by a certified accountant adds validity and reassures lenders of your income and ability to meet repayments.

Debt Denomination

Finally, debt and investment are two important areas of personal finance, and both can heavily be impacted by currency.

Debt works just like income, but in reverse.

Here, you actually want the denominated currency to depreciate, because that way it becomes relatively cheaper to pay off. For example, you may have a loan in EUR from when you lived in Spain, but now live in the US and receive a USD income. Because the Dollar is strengthening against the Euro over time, this debt gets relatively smaller.

How Currency Impacts Investing

When it comes to retirement investing, such currency speculation is important to avoid. The best way to hedge against currency risk is to invest in the denomination of currency that you’re planning to retire in. It’s that simple.

But, this isn’t always possible. You may be using a retirement product from back home that provides a tax wrapper, but when possible, your portfolio will ideally be in the same currency that you want to withdraw and spend the money in.

This emphasizes the importance of diversification, too. Not only are different industries and markets unpredictably outperforming one another, so too are currencies. By investing in global companies, not just US firms, it’s possible to capture some of that currency diversification implicitly.

Although it may be tempting to denominate investments in various currencies as a way to diversify, this doesn’t work as straightforwardly as it may appear. It introduces layers of complexity, not only with paying taxes on capital gains, but may incur higher transaction costs and regulatory hurdles.

Plus, it makes no difference. For example, Brits investing in the S&P 500 (US stocks) through a GBP fund (e.g., VUAG) is the same as investing in a USD-denominated S&P 500 fund – you will still need to exchange the money back when selling. You’re subject to the same exchange rates affecting the underlying assets in both cases. Your exposure remains the same.

Making Currency Work for You

Currency doesn’t have to be a hurdle; with the right approach, it can become a powerful ally in your financial journey abroad. Here are some practical steps to help you manage your money across borders:

1. Open a Multi-Currency Account

If you’re juggling finances in different countries, a multi-currency account is a must-have. It allows you to hold, send, and receive various currencies under one roof, eliminating the need for constant conversions that can eat into your funds with fees and unfavorable exchange rates.

For instance, banks like HSBC Expat offer accounts where you can manage multiple currencies and even earn interest on your balances. If you’re looking for something more accessible, fintech platforms like Wise provide the ability to hold up to 40 different currencies and offer local account details in several countries. This setup not only saves you money but also simplifies your financial life by letting you operate as if you had local bank accounts in multiple countries.

2. Leverage Natural Currency Hedging

If you earn and spend in the same foreign currency, you can benefit from what’s known as natural currency hedging. Say you own a rental property abroad and collect rent in that local currency. You can use this income to cover expenses like maintenance, taxes, and utilities without converting it back and forth between currencies. This strategy reduces your exposure to exchange rate fluctuations and saves on conversion fees.

3. Be Cautious with Currency Hedging in Investments

While it might be tempting to hedge against currency fluctuations in your investment portfolio, it’s not always the best move for long-term investments. Hedging can introduce additional costs and complexities without providing significant benefits over time. Historical data shows that currency movements tend to balance out in the long run. Instead, consider investing in funds that are already hedged or focus on building a globally diversified portfolio that naturally mitigates currency risks.

4. Partner with a Currency Broker

When dealing with large transactions, such as buying property or transferring significant sums of money, having a currency broker on your side can be invaluable. Brokers like Currencies Direct offer personalized service, competitive exchange rates, and advanced tools like forward contracts and limit orders. These tools allow you to lock in favorable exchange rates for future transactions or set target rates for automatic exchanges, giving you more control over your money.

For example, if you’re planning to purchase a home abroad, you can use a forward contract to lock in the current exchange rate, protecting yourself from potential rate drops. Alternatively, limit orders let you set a desired exchange rate, and the transaction will automatically execute when the market reaches that rate.

5. Account for Additional Costs in Overseas Investments

Investing abroad can come with hidden costs and regulatory hurdles. These may include currency conversion fees, local taxes, legal expenses, and restrictions on foreign ownership. Before diving in, it’s crucial to factor in all these expenses to ensure that the investment is financially viable. Sometimes, the potential returns may be offset by these additional costs, so doing a thorough cost-benefit analysis is essential.