Saving in foreign currencies
I live in the UK and am looking at opening a USD account. The primary reason for this is that I work for an American company whose employee share plan deals in USD, so it is required for that. However, I have thought of perhaps other uses too. I am not in any way a financial expert so I am wondering if my ideas make any sense.
Firstly, I intend/expect to travel to the US a bit over the next few years. So, I thought that in order to save cash for spending on those trips it would be better for me to save directly in dollars each month. Rather than saving in sterling and converting it to dollars in one big transaction just before travelling. I figure if I spread out exchanges then on balance I am usually going to get a better effective rate than if I leave myself at the mercy of whatever the rate happens to be when I convert in one go.
Secondly, I know it is a good idea to spread one's savings across a number of areas (cash, investments, gold etc.) if you want to see it grow. So, I thought why not save for the long term in multiple currencies. Rather than leave my cash savings as just sterling, I could spread them across a few currencies and theoretically see more growth. Does this make sense? I am honestly very much a novice here. But, given that interest rates vary based on the issuing central bank, I think I'll get different rates for different currencies and won't just have to rely on the rate for one currency doing well for me.
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Changing money from one currency to another can be a very costly transaction. Looking at today's rates for exchanging GBP to USD, the difference between the market USD/GBP rate and the rate offered by the high street banks is a little over 5%. For example, Barclays is quoting 1.2989 as compared to a market rate of 1.3685. Giving up 5% of your money just to change between currencies is a horrendous proposition. Despite Friday's extreme volatility in the currency markets, a difference of 5% (or higher) is typical of high street foreign exchange transactions.
One way of minimising this cost is to exchange large amounts at a time. For example, I know from experience that exchanging the equivalent of ,000 with HSBC will get you a rate of about 0.75% away from the market rate. Exchanging the equivalent of ,000 will get you a rate of about 0.25-0.50% away from the market rate. However, this requires that you have an HSBC "Premier Account". Lesser "status" accounts will get slightly inferior rates but still much better than the high street rates on offer.
The risk in exchanging larger amounts less frequently is that your timing may mean that you are buying a large amount at an unfavourable rate. However, saving 4-4.5% on the exchange means that it will need to be very unfavourable timing to leave you worse off.
It may be that other high street banks offer similarly favourable rates to those offered by HSBC on larger transactions. Speak to your bank asking them what they can offer and if necessary, speak to HSBC.
Regarding the purchase of shares via your employer's share plan, it is likely that your employer will offer you the right to pay in GBP at very favourable rates, with the employer taking upon themselves the requirement to exchange the funds. Speak to your employer.
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