It’s a new year, and if you’re like most Americans, you probably rolled over a few vacation days. In fact, according to one study, nearly 55% of Americans don’t use all of their vacation days.[i] Whether you’re working or enjoying the fruits of your labor in retirement, everyone can celebrate the fact that winter is almost over, and that means it’s time to start planning your next trip! But before you book your trip to the usual domestic spots, I’d like to point out that now may be a better time than ever to consider traveling outside the U.S.
Strong Dollar, Strong Wanderlust
When traveling abroad, potentially one of the biggest factors in how much you’ll spend is how far your U.S. dollar will go when converted to the local currency. Throughout much of the 2000s, the answer to that question was fairly underwhelming. Let’s say you traveled to London for the 2012 Olympic Games and scored tickets to the semi-finals for your favorite sport: badminton. While the £100 pounds you spent felt well worth it, when converted to U.S. dollars, you actually spent approximately $160 U.S. dollars (ouch!). Or if you traveled to Italy in early 2014 and purchased a glass of Chianti for €10 Euros, you actually spent $14 U.S. dollars.
But starting in the second half of 2014, Americans traveling abroad have seen their dollar go further. Low interest rates abroad and global economic uncertainty caused investors to favor the U.S. dollar, increasing its value relative to other global currencies.
The trend of a strengthening U.S. dollar has continued into 2017, and Americans are looking at fairly large discounts on the goods and services they’ll purchase abroad. Let’s go back several years and compare exchange rates from January 1st of 2014 to January 1st of 2017. In North America, the U.S. dollar can now buy 26% more Canadian dollars and 59% more Mexican pesos than it could three years ago. In other words, American tourists in 2017 pay approximately 26% less for a ski lift ticket in Vancouver and 59% less for a margarita in Mexico than they did in 2014. Across the pond, the dollar now buys 24% more Euros and 25% more British pounds. And if you’re a little more adventurous, you might consider Brazil, where the dollar is almost 40% stronger over those three years[ii].
Be Smart When Making the Conversion
If I’ve piqued your curiosity in making international travel plans for 2017, you’ll make your dollar go even further by following these three guidelines when traveling abroad.
Choose your bank wisely
While credit cards offer convenience, it can also be important to have physical currency with you abroad. You may also find once you land that credit cards are not accepted as frequently as they are in the U.S.
First things first, never exchange your dollars at the airport. It generally will have the worst exchange rates and ding you with a hefty processing fee. Instead, do a little homework before you travel and choose a debit card with a bank that will give you the lowest cost to convert currency. With many banks, you can expect to pay between $2-$5 per withdrawal, plus a foreign exchange transaction fee as high as 3%.
Charles Schwab offers a High Yield Investor Checking Account that will reimburse you for all your ATM withdrawal fees and assesses no foreign exchange transaction fees. TD Bank also waives foreign transaction fees, but will assess a $3 ATM fee.
For a thorough breakdown of banking institutions and the foreign transaction fees they’ll charge, click here. While these fees might not seem significant, they can certainly add up over time.
Consider a pre-paid debit card
In case you’re part of the generation that misses traveler’s checks, take heart! While millennial travelers such as myself do not have experience with traveler’s checks, prepaid debit cards are the smart, modern version.
Visa offers a TravelMoney Card that allows you to add funds of the foreign currency over the phone or online to this debit card. Although you will be assessed a foreign transaction fee and an ATM withdrawal fee, it’s safer than cash and can be easily replaced if it’s lost or stolen. Travelex offers a Cash Passport™ that also allows you to prefund up to 6 currencies and does not charge an international ATM fee. Changes in exchange rates can occur quickly, so utilizing a prepaid card adds the convenience of locking in a rate at the time you fund the account.
Beware of Dynamic Currency Conversion
If you do make a purchase with your credit card, you may be asked to pay in either the local currency or your home currency. If you decide to pay in your home currency, the merchant offers to convert to the local currency on your behalf. This process, known as dynamic currency conversion, provides you the convenience of seeing the cost of the purchase in U.S. dollars or the local currency at the time of purchase, rather than having to wait for the charge to post to your statement. The downside is that the conversion rate you will receive is typically much worse than the going rate. Merchants will take the difference as their fee and rely on customers not checking the math at the time of purchase.
Many travelers also assume that their credit card will not charge a foreign transaction fee if they choose dynamic currency conversion. Wrong again. To avoid those fees, consider shopping around for credit cards that do not have foreign transaction fees.
Whether you’re a seasoned traveler or thinking about taking your first big trip outside the U.S., I hope I’ve given you a few things to consider when making your hard-earned U.S. dollar go further abroad. Happy travels!
The author is Grant Cooper, a Portfolio Manager Assistant with Johnson Investment Counsel. (Johnson)
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