When you're dealing with money from all over the world, exchange rates are important. In order to find them, all you have to do is compare the value of two different currencies. Seems simple enough, right?
Well, not particularly. If you often switch between two or more currencies, you'll know that calculating an exchange rate is not so straightforward.
Firstly, the rates are in constant fluctuation. Just like the stock market, exchange rates move according to supply and demand; global money is traded around the clock. Secondly, you will receive different rates than people trading on the open market. Even then, the exchange rates you're offered will vary from bank to bank and service to service.
With so many variables, how do you know which exchange rate is fair to ensure you get the best deal available?
Check out this easy guide to calculating the exchange rate - make sure you’re not ripped off when you swap your currencies.
Let’s start with a basic example. Maybe you’re a British pensioner who lives in Spain but earns your £400 pension from the UK. In that case, you’d need to change your Sterling to Euros every month.
Searching online, the exchange rate would look like this:
1GBP = 1.12EUR
That would mean 1 Pound Sterling buys 1.12 Euros. Since your monthly pension was £400, you’d calculate it like this:
£400 X €1.12 = €448.
A £400 pension here would equal €448.
On the other hand, perhaps you have a rental in Spain and need to pay exactly €500. How many British Pounds would you need, then?
In this case, the exchange rate would be written the opposite way around, like this:
1EUR = 0.89GBP.
To find the Sterling cost of €500, repeat the earlier calculation: €500 X £0.89 = £445. Here, to pay a €500 rent, you’d need £445.80.
Though the calculations themselves may be clear enough, that doesn't mean it's easy to avoid being ripped off along the way. Banks and money transfer services are known for offering exchange rates that deviate significantly from the actual market.
Banks, along with ForEx specialists, credit cards, and other money transfer services almost always take a percentage cut for every exchange they make for you. That means the exchange rate you’re offered at your bank is not the same as the exchange rate you'll find on Google - the rate you'd get if you were a trader working with huge sums of money on global trading platforms.
In some ways, this makes perfect sense - traders work with virtual money, so the administration costs are smaller. Because you generally want quick and easy access to your converted cash, markup seems inevitable.
Yet there are as many different exchange rates as there are banks, and each bank takes a different percentage cut when exchanging your money (on top of their own added fees). These percentage cuts are rarely transparent - it can be quite to difficult to see if you’re being ripped off.
A good way to compare the rates is to figure out the markup being added by different banks or money exchange services. It’s also good to remember to take into account any extra fees applied for the transaction.
You can do this simply by comparing the exchange rate offered by the bank with the exchange rate you find on Google.
You’ll first need to find the rate for the currency pair you’re working with.
For example, if you want to convert U.S. Dollars to Indian Rupees, use the abbreviations USD and INR:
The currency you are converting from (USD) will be on the left - always expressed as one unit.
The currency you are converting into (INR) will be on the right - that's the cost of one unit.
So if the rate of USD to INR is 66.73, you'll know that one U.S. dollar will buy you a little less than 67 Indian rupees.
Because banks take a cut, you'll almost always get a different exchange rate than the rate you find online. But not only will your rate vary from bank to bank, it will also depend on a variety of factors. How much you're exchanging, which currencies you're using, and whether you're changing money online or in person can all affect the rate you're offered by the transfer service.
In our example, the exchange rate for USD/INR was 66.73, but let’s say the rate your bank offers is 63.93.
To calculate the markup, you'll need to work out the difference between the two rates and then translate this into a percentage.
Here, the difference between the real rate and your bank’s rate is:
66.73 - 63.93 = 2.80
To turn this into a percentage, you’ll divide it by the original exchange rate and then multiply by 100:
2.80 ÷ 66.73 = 0.04196 x 100 = 4.20%
In this example, your bank would be charging a 4.20% markup to convert your money for you (assuming there aren't any additional fees). By calculating the percentage for each currency exchange service you are researching, you can then easily compare.
If you're travelling overseas for holiday, receiving a paycheck/pension in another currency, or buying foreign property, then exchange rates really do matter. Doing your research is the best way to make sure you’re not ripped off on the transaction.
Start by researching the rate on Google to give you a benchmark. Sign up for our exchange rate tracker to help you figure out the best time to exchange your money. If it looks like rates have taken a dive but may still recover, wait for a better time to exchange your money if you can. When it's finally time to swap currencies, just make sure to compare the rates you've been offered.
Most importantly, don’t get caught paying bank charges and exchange rates that are hidden in the fine print. You’ve worked hard for your money - make sure you’re not handing it over for anything less than the best deal out there.