How Exchange Rates Work When Planning International Travel

Before you take off for that international vacation of your dreams, you'll need to understand how exchange rates work. Exchange rates can impact multiple areas of your vacation budget, from when and where you decide to travel to how much you can spend when you get there.

All it takes is a little education to get you in the best financial mindset when you've got an eye on international travel. The tips below will help you plan, save on currency exchange costs and get the most out of your global adventures.

A quick primer on how exchange rates work

An exchange rate is a conversion. It tells you how much your home currency will buy in a foreign currency. These exchange rates fluctuate throughout each day, because they're traded on the financial markets, much like stocks. It's important to note that when you exchange your currency it will impact how much you're able to buy in a foreign currency.

When planning your travel, you'll want to research the exchange rates in the countries you're visiting. In fact, you might want to use exchange rates to help plan where you'll travel. For example, if the US dollar is strong against the Japanese yen, that would be an excellent time to take that trip to Japan as your money will stretch further and help you save on your trip. If the dollar is weak against a particular foreign currency and you still want to travel to that region, you'll need to adjust your vacation budget accordingly, knowing it's going to be a more expensive trip.

You may even consider adding some padding to your overall trip budget to allow for exchange rate fluctuations.

How to save on currency exchange costs

At some point in your travel plans, whether before you leave or when you arrive, you'll likely have to exchange currency so you have some cash available during your trip. Most places that can exchange currency for you will charge a fee. The key to saving money on exchange costs is to think of money exchangers in terms of convenience and cost. The more convenient a money exchange location is, like airport kiosks, the higher the transaction fee tends to be. They're charging you for the convenience of their service.

To help you save the most on exchanging cash, here are six tips to help you both plan ahead and make purchases in local currency at the lowest possible exchange rate.

1 Exchange money at your bank

Banks commonly have some of the most favorable exchange rates, so be sure to exchange money before you leave at your local bank. Check in with them at least a week before leaving, because banks sometimes have to order specific currencies if they don't have them on hand.

2 Exchange money over time before your trip

If you plan your trip several months in advance, you can exchange currency at your local bank over time. By exchanging a little money every few weeks, you can pay attention to the exchange rate over time and take advantage when rates are low. This could help you pay a lower average exchange rate than if you'd waited and exchanged your money all at once.

3 Use credit cards with low or no foreign transaction fees

Using credit cards can help you take advantage of some of the most favorable exchange rates during your trip. Be sure to understand your preferred credit card's terms on foreign transaction fees before you leave home.

4 Skip the airport currency exchange

While these kiosks will greet you warmly when you arrive at your destination, they're known to have some of the least favorable exchange rates. Use a credit card to cover incidental expenses until you can get to an ATM.

5 Use ATMs to get cash when you arrive

ATMs often have some of the most favorable currency exchange rates. When using an ATM abroad, try to get cash in as few transactions as possible to help minimize any ATM fees charged by your bank.

6 Spend coins before returning home

As your trip nears its end, make spending your local currency coins a priority. Many banks won't buy back coins and will only accept bills for exchange. This strategy will help prevent coming home with money you can't exchange or spend until you make a return voyage.

Plan ahead for smooth travels

Foreign currency exchange is an important factor to consider when planning a trip, but it doesn't have to add to your stress. With a little thinking ahead, you can minimize the costs, time and effort associated with getting cash to use locally and get onto enjoying your vacation.