Right…so this is supposed to be a blog dedicated to financial matters for startups. And for the most part, with the exception of this one post, I’ve stayed on topic to an impressive extent. But there is an issue that I keep encountering and I feel I must address it. That issue? The common fallacy that you will always be so much better off here if you are getting paid in US dollars or if you keep the bulk of your money in US dollars and/or in a US bank account. And the related common fallacy that you can get ahead by using US credit cards to pay your Israeli expenses and accruing points for travel or cashback.
Boys and girls, I think it’s time to introduce you to the concept of foreign exchange risk.
Where the hell did THAT come from?
I keep on running across this subject. Here are examples from actual conversations I’ve had with people.
- The dollar is stronger than the shekel because you get more than one shekel for each dollar.
- My husband and I put as much of our expenses on our Discover/ American Airlines/ other US card so we can earn cashback/ plane tickets/ some other reward
- US salaries are higher than in Israel so you will automatically do better working with the US and earning dollars
- It costs too much money to transfer dollars from abroad.
Sigh…. Time for some myth busting
The basic problem
Now, I could try to give you a whole lesson on foreign currency markets and relative strength of currencies and so on. But I’m neither an economist nor a foreign currency expert and it would be a truly pathetic lesson. What I am, however, is an accountant who is used to running a multi-currency budget. And as such, let me tell you…you are forgetting one very critical point.
Exchange rate risk.
That currency can drop on you like a stone. And when it does:
- the amount of shekels you can convert your foreign currency into will drop; and
- the amount of foreign currency you will need to pay for stuff here will increase.
All while the actual price of stuff, in shekels, stays the same. ‘Cause neither the shekel nor the Israeli economy care about your desire to collect US Airways airline miles.
Some examples of currency dropping like stones
Take, if you will, the British pound.
During 2015, the average pound to shekel exchange rate was 5.94. And then came Brexit. As of July 31, it was 4.66. That’s a drop of 21%.
Oh, but that’s just the British. They lost their empire. The sun has set. The US has a strong currency!
No problem! Let’s take a look at the US dollar.
During 2015, the average dollar to shekel exchange rate was 3.889. As of July 31, it was 3.558, a drop of 8%.
What does this mean, tachles?
It means that if you are living in Israel but keeping your life denominated in dollars, you are now earning less and paying more.
Read that line again and let it sink in. If you are living in Israel but keeping your life denominated in dollars, you are now earning less and paying more.
For instance, suppose that you have a job where you are getting paid $75,000 per year, or $6,250 per month. At a rate of 3.889, your monthly salary was ₪24,306. Once the rate dropped to 3.558, your effective monthly salary would have fallen by ₪2,069, to ₪22,338. That’s nearly ₪25,000 over the course of a year.
Now let’s look at the expenses. You put as much of your expenses as you can on your US credit card. Groceries, arnona (municipal tax), kid’s school fees, etc. Let’s assume that it totals up to ₪15,000 per month, on average. At a rate of 3.889, this cost you $3,857 and at a rate of 3.558, $4,216. That’s an increase of $359 per month ($4,305 per year). And that is above and beyond the increases in our ridiculously high, shekel-based cost of living.
To sum up, your salary is down by ₪25,000 and your expenses are up by $4,300. That just cannot be good for your budget.
It’s worth noting that this risk exists all the time; you never know exactly how much you are going to earn or how much something is going to cost. Rates literally change from minute to minute. And of course, all of this is before one gets to issues like conversion fees or whether the bank is giving you the best possible conversion rate. Banks are damn good at making money. For themselves.
But rates go up as well!
They do! And there are people who engage in foreign currency trading in order to profit from these swings. Maybe you are one of them. But we aren’t talking about your investment activity here. This is your salary or the bulk of your finances. Your monthly household budget. Your ability to pay the bills. And you are putting them at the mercy of world markets.
It’s kinda like, you don’t go to Vegas and use the grocery money to play the slots.
If you want to invest in foreign currency, sababa. Make sure you do your homework first. And then, in the same way that you would set aside money to invest in a mutual fund, set aside money to invest in foreign currency.
So, when does it make sense to use foreign currency?
My rule of thumb? As much as possible, keep it local and keep it cheap. Pay for Israeli costs from your shekel accounts (including a local air-miles card, if you must). Pay for US costs from your dollar accounts. Minimize uncertainty, conversions and costs.
Ummm…hello??? What shekel accounts? All of my income is in dollars.
Even if you didn’t choose to earn in dollars and live in shekels—the US-based job is just how your personal cookie crumbled—there are things you can do to reduce the costs and risks:
- Aim for a situation in which you convert when you want to and not when you have to. The word “have” is key. Your ideal is to be able to convert when the rates are in your favor as opposed to when you have to, because you have to pay bills. If possible, create a shekel “buffer”. Having, say, three months of expenses, means that you can keep an eye on the rates (or set something up so the bank does so) and convert when the rates are a bit better.
- If you can’t convert a three month buffer amount, convert enough money to cover costs for a period of time, as opposed to on an individual basis.
- Take another look at your situation. Is there something you can do to offset the risk? If you are married, and both of you work, perhaps one of you can get a job here that pays shekels. Every shekel you earn is one you don’t have to convert.
- Instead of leaving your money in the US and accessing it via a US credit card or just transferring it over when you need it, you can transfer some of it to a local bank and have it available for conversion to shekels.
- Research banks thoroughly and make sure that you are getting the absolute best rates for your FX transactions. You can learn more about that here.
Alternatively, if you are like me, a US expat whose entire salary is in shekels, you have the opposite problem. You do need dollars here and there—for US taxes, visits to the Old Country or even investing—but you aren’t earning any. My method is to save up shekels, convert them to dollars and wire them back to the US. Seeing how these are expensive dollars (conversion fees and wire transfer fees) I’m not going to waste them on nonsense! So minor foreign currency purchases I make using my Israeli credit card, which will immediately convert it to shekels. (I take the current FX rate into account when assessing if the item fits my budget.) Larger items in the US I pay for from my US account. Since I tend to know about these far in advance, I can stockpile shekels and convert them to dollars when the shekel is stronger. (That is, when I want to and not when I have to).
This just doesn’t make sense. How is converting a LOT of dollars at once—when the rate might be crap—better than doing small amounts, only as needed?
To reiterate, we are talking about managing your household finances and budget, and not your investment portfolio. Your goal here is to minimize surprises.
- Once the conversion is done, that’s it. Your rate is “locked in”, as it were. You won’t gain anything if the rate goes up, but you also won’t lose anything if the rate goes down.
- You know how much money you have and can set a budget without having to worry that the kids’ school fees will cost you an extra $50 because the Fed did or didn’t do something.
- You may find it easier to negotiate favorable conversion terms with a local bank with whom you have a relationship (and NIS and USD accounts) than with a US credit card company. And again, I’ll be posting more about that next week.
But my friend/ cousin/ neighbor’s sister’s friend’s boss gets X
Everyone has a story about how they know someone or know of someone who does really well, and leaves all of their money in the US and so on. And they very well might. But their situation may be different than yours. Maybe they have income, savings or a trust fund in the millions and, yeah, they get freakin’ fantastic treatment from banks in any country. Maybe they have set up currency hedges. Maybe they have simply accepted the additional uncertainty because they have other issues that they have to manage, such as tax considerations, and these take precedence. Maybe their finances are actually a flaming train wreck. Maybe they just don’t care.
Or maybe they aren’t telling you everything. Because math is math, even for rich people.
A bit of background
It’s worth noting that, once upon a time, having your income and finances denominated in dollars was beneficial. Not only was the dollar very strong in relation to the shekel but certain high-ticket items, in particular home prices and rent, were set in USD. So if your income stream was in dollars, you were set. If your income stream was in shekels, of course, you were screwed.
But that isn’t the case anymore.
It changed when the exchange rate dropped massively in 2005/2006 and all of a sudden the landlords started to receive less money each month. At which point they miraculously decided that rent denominated in shekels was actually a good idea. (Shocking, no?)
Credit where it’s due
Two lovely people helped me with this post. Ahuvah Berger Burcat, is my co-admin in the Living in Israel-Debt Free Facebook group and the person who introduced me to Dave Ramsey. You are welcome to check us out, but please note that (1) it’s Israel-focused and (2) it’s Dave Ramsey style. That means maximum responsibility, minimum blaming others, a profound fondness for budgeting and a marked aversion to debt. Amitai Wolt is a member of the group as well. He helps startups and companies with strategic planning, growth, international business development and business operations, in particular advising them how to work with the US and Canada. He’s always posting stuff in our group about how to save on FX transactions, so I figured he would be a great resource. (He’s actually to be the source of next week’s post on banking tips). Feel free to ping me if you would like to be in touch with him.
And finally, another amazing source for personal finance tools, resources and support is Paamonim (English site can be found here). They offer everything from budgeting tools to counseling to courses, all free of charge! 🙂 (Full disclosure—I volunteer with Paamonim as a financial counselor).