Earlier this week, I was chatting with a friend in our co-working space over some coffee. She asked me a question about money, and, with one thing leading to another, we came out with not only a great discussion but one worth sharing.
For many remote workers and digital nomads, frequently, getting paid means receiving money in a different currency. This situation raises some questions:
- How’s the best way to get this cash into my hands?
- Should I leave some or all of my money in a different currency?
- What’s going on with currencies anyways?
For my friend, these questions went from theoretical to practical.
My friend is a German expat living here in Barcelona and works remotely for an American company.
Each month, her employer pays her salary in dollars. Here in Spain, we live in euros. Therefore, she needed to figure out what to do with that cash.
- Digital Nomads and remote workers have 4 options when getting paid in a different currency
- Generally, they should either convert it to the currency they live on or in invest in
- Speculating or waiting for a “better” exchange rate is risky and could come with a high tax bill
First, we went over some basic concepts of exchange rates. If you’re not familiar with them, you can check out our article here .
In brief, the exchange rate is the difference in performance between the two economies. If country A has a higher interest rate than country B, then country A is more attractive to investors, making the currency stronger. While there are a lot of other factors going on, interest rates are at the core of the exchange rate.
With that explained, we discussed her options. We came out with four possibilities:
- Spend the money
- Gain interest on your deposit
- Speculate on it
- Exchange the dollars into euros
Through deduction, we were able to find the best course of action. Let’s go over each one.
Spend the money
Since she receives all of her pay in dollars, it could be tempting at first to leave it there and spend it as is. However, she also knew that the FX rate changes by the minute. This change impacts all of her costs, since each time she would make a purchase, she would get a different exchange rate.
I asked her if she had any subscriptions in dollars. After all, a lot of companies offering online tools and entertainment charge in dollars. If she already had dollars, then it would make sense to keep them for these purchases.
She didn’t have any so we moved on to the next point.
Gain interest on your deposit
Like millions of others around the world, my friend uses a low-cost currency exchange service to transfer her money. Companies like TransferWise and CurrencyFair, along with “neobanks” such as Revolut and N26, let their users exchange money at fair rates and low costs. Many of these companies do not pay interest on their clients’ accounts.
For FX exchange companies, that makes sense. Transactions are their business. For neobanks, it’s a little less clear if and when they do.
Perhaps more frustrating is that all of these institutions do make money on the deposits, but only for themselves. This interest gets paid by the banks they work with, who pay it every day.
As my friend wasn’t gaining interest on her dollars in her TransferWise account, we ruled out this option.
Speculate on it
Since she wasn’t spending the money in dollars, nor was she earning interest on her account, we moved on to speculation.
Speculating on currencies means waiting until the FX rate moves in your favor, do the exchange, and making a small profit.
Hey, there’s nothing wrong with making some money, right? Sadly, there’s no free lunch, not even with exchange rates.
There is absolutely no guarantee that the rate will ever get to a point where you would make a profit. Even if it does get there, predicting when is about as accurate as predicting which days it will rain next year.
Further, since her cash wouldn’t earn interest on the deposit, she stood to lose out while waiting for the right FX rate.
Between this uncertainty and the fact that she would be liable for a capital gains tax on the profit, we ruled out speculation, leaving us with one final option.
The best investors (and the ones who can sleep at night) invest within their risk tolerance. Do you know yours?
Exchange the dollars into euros
In the end, we decided that exchanging dollars into euros was the best option.
The other choices either left her open to risk or a loss in value of her money over time. This decision might seem strange on the surface. After all, most savings accounts in the eurozone have terrible deposit rates of well under 1%.
But speculating on the exchange rate without earning interest while waiting, is much riskier; especially if she needed the money suddenly due to an emergency.
She agreed and decided to transfer the funds into her bank account later that day.
Great. So now what?
Getting the money into euros was a big first step. Still, holding onto euros over a long time is also risky.
We all want our money to work for us so that it can grow and protect its future value. How we do so is another question entirely.
There are many ways, mostly through investments, such as stocks, bonds, pension plans, and funds.
Understanding which investments to put your cash in and how to manage it is confusing enough for most people. This question is even more perplexing when you’re living abroad.
At abroaden, we help digital nomads, remote workers, and expats find the best way to invest and manage their money. If this article hits close to home, we’re here to help.
Abroaden is a company for expats, digital nomads and other world citizens looking for low-cost and transparent financial advice and investment management.
Note that this article is for information and educational purposes only. It does not constitute financial advice.