Travel costs money. There’s just no way around it: if you want to go from one place to another, it’s going to cost you something to get there. Once you arrive, it will cost you money to stay there. And when you’re ready to come home, that will cost you money, too.

When you travel outside of your home country, though–since I’m American, this article will focus on Americans traveling outside of the United States, but it applies to people of any nationality–there’s another cost that most new travelers don’t consider. That’s the cost of money itself.

There’s nothing magical about money. It’s an arbitrary construct made by governments and enforced by law as a means of exchanging value. (One of the three formal defining characteristics of money, in fact, is that it must be a “store of value.”) And while some countries choose for a number of reasons to use the currency of other countries to operate their economies, most nations exercise their sovereign right to create and print their own unique form of money.

What makes all of this a little tricky is that the value of one form of money versus another fluctuates, literally on a constant basis every second the day on a 24-hour clock. The exchange rate between two currencies is the quantity of one needed to buy a preset amount of the other. For instance, at the specific moment that this article is being written, it costs just over $1.95 in U.S. dollars (USD) to purchase one British Pound Sterling (GBP).

Why currency fluctuates is a function of the international monetary system that is difficult to explain even in complex macroeconomic terms. You might think of it, though, as based on the relative strengths of two economies as defined by their collective wealth, money in circulation, debt, and optimism for future growth, compared to what they were previously. (The last point is critical; many Americans are surprised or even outraged to learn that the U.S. dollar is not the strongest currency, given that the United States has the world’s largest economy. Exchange rates deal with the size of the money supply, not just the size of the economy.)

The reason that exchange rates have such an impact on travelers is because prices in a given locale don’t change based on exchange rates. A double cheeseburger on the McDonald’s Dollar Menu, for instance, costs $1.00 USD, regardless of whether $1.00 USD is equal to 0.65 GBP or 0.50 GBP. If a British woman visits the United States and goes to McDonald’s for lunch, she’s spending dollars, but they’re dollars that she converted from pounds, which is how she measures her personal wealth back home. If the dollar is “weak” to the point–if she can get more dollars for a pound than is usually the case–then she’s buying that double cheeseburger for fewer pounds, which means less money even though the dollars spent are the same.

If that was a little confusing, it’s understandable. Americans don’t travel as much as say, Europeans, because our country is so big. Anywhere that we travel within our borders, which include U.S. territories like Puerto Rico and the U.S. Virgin Islands, we use dollars. It’s only when we venture out that we encounter exchange rates. The effect, though, is enormously significant.

When the U.S. dollar is weak versus a foreign currency, it costs Americans a lot more to live in countries that use that currency. As of January 2007, for example, the British pound and the European Union’s euro are both strong against the dollar. That makes the cost of visiting Europe high on a daily basis even if you get a cheap airfare. The longer that you stay, the more impact the high exchange rate will have on your budget.

On the other hand, if you travel to a country where the U.S. dollar is strong, you’ll spend less American money to get the same amount of local currency and thus have a lower cost of living while you’re there. The Argentine peso, for instance, is presently weak to the dollar; take a trip to Buenos Aires, and you can enoy steaks that might usually cost you $35 for around $12 (even though the price hasn’t changed in terms of pesos).

Here are some tips for keeping your spending under control when you travel abroad:

  1. Do your homework. It’s easy to look up prevailing exchange rates at http://www.forex.com. It’s a little harder to know what the exchange rate usually is, which is what you need to know to decide whether a currency is strong or weak–for instance, the measure of U.S. strength vs. the Japanese yen is based on blocks of 100 yen, not 1 yen. Web searches can help.
  2. Take trips to places with weak currency. At any given time, some currencies are strong to the dollar and others are weak. If you want to see the world for less money, focus on traveling to places where your money will go farther. The rates change constantly, so you’ll eventually get to everywhere on your list.
  3. Use cash while you’re there. It’s hard enough to decide whether 5 euros is expensive for a sandwich if you know that the 5 euros cost you $8.00 at the time you made the exchange. With a credit card, the trade is made using the exchange rate at the instant of the sale–which you don’t know.

Finally, remember that some countries used pegged currency, which is to say that they assign their currency a fixed value based on another country’s money supply. For years, Argentina pegged the value of its peso at 1:1 with the U.S. dollar, which forced the pesos to hold their value. If a country has its currency pegged to yours, ignore exchange rates because the value you spend won’t change. Exchange rates can be a little tricky to grasp and are among the most complex ideas to truly master. If you plan your travels right, though, you can use them to make your money stretch farther overseas than it ever would at home. That’s one of the secrets of traveling on a budget.



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