One of confusing things while traveling is figuring out if you are getting a good exchange rate for your money or are getting ripped off. I know that from my own perspective, when I walk up to a money exchange office, I always do a double take on the “we buy” or “we sell” listings. Which is which?

I’ll explain it all in a second, but here is the easiest way to determine whether the rate you are being offered is a good one or not:

Just look at the difference between the two rates — done

The difference between the two rates is the profit for the money changer. The more narrow that gap is, the less profit they are making on the exchange and the more value you are getting. A narrow gap in the two rates means you are getting a good rate. A wide gap means you are getting ripped off. Its that easy. The only other thing you need to know is whether there is a commission charged, which also decreases your value, but it is usually easy enough to find a no-commission exchange.

money change rates airport

horrible, horrible, horrible rates at Heathrow

Let’s take the example at the right, which I just took a shot of when I went through Heathrow Airport a couple weeks ago. First take a look at the splits between the “we buy” and “we sell” rates.

Truly horrible.

As a general rule, never exchange money in airports or train stations. Places where tourists are newly arriving in a country are notorious for having rates that frankly should be criminal.

Here, they are offering to sell you 1 British Pound for $1.84 (they are the ones “buying” the dollars — ergo the “we buy” rate). On the other hand, if you gave them 1 British Pound, the would give you $1.46 (they are selling you dollars for your pounds).

Not surprisingly, the real exchange rate for British Pounds to US Dollars is $1.62 — right in the middle of the spread they are offering.

Their profit is your loss. In this case, the difference between the real exchange rate and the rate at which you would be buying British Pounds on your arrival at Heathrow is 12%. Similarly, if you arrived at Heathrow and wanted to change your pounds for dollars on your way home, you’d be losing 9%.

I love the U.K. and all, but I don’t need to be contributing that bit to their economy since there are so many better options in town.

Unless you are exchanging money at a “non traditional location,” such as a guy offering to swap with you on the street like I had to do a few times in Africa, this simple little tip is the easy way for you to navigate whether you should exchange money at any legitimate exchange shop.

All that being said, I personally think it is a lot better idea to just use ATMs to get local currency, instead of carrying around money to be exchanged. But that being said, sometimes you are leaving a country and just need to change the leftover cash you have into something you can use.

Just don’t do it at Heathrow.

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I’m an attorney that took off on my birthday in December of 2008 to circumnavigate the globe without ever getting on an airplane. After 16 months, 6 continents and 44 countries, I made it all the way back home. Right now, I am back on the road writing about it all. Read more by Michael Hodson and connect on Google Plus.

11 Responses to “The simple solution to calculating exchange rates” Subscribe

  1. Lucie December 28, 2012 at 11:33 am #

    Well that’s a best advice ever, as I never understand anything about exchange rates! Thank you!

  2. Roy Marvelous December 28, 2012 at 2:37 pm #

    Absolutely! Always look at the spread.

    Amazes me how many people still get fooled by the “No Commission” B.S.

  3. Marco Fiori December 28, 2012 at 3:18 pm #

    I’ve always found The Money Shop in the UK, a chain of cheque cashers / foreign currency exchange to be really reasonable with their rates. They’re on a fair few high streets in London. No, before anyone asks, I don’t work for them; they’re just worth a recommendation.

  4. Steph (@ 20 Years Hence) December 28, 2012 at 7:39 pm #

    I feel kind of embarrassed that I have never understood how these counters work, but now I no longer have to hang my head in shame! That said, like you, my husband and I have been sticking to ATMs the entire time we have been traveling and that has been brilliant. But it never hurts to have a back-up option (preferably one you understand!).

  5. Deb December 30, 2012 at 2:20 pm #

    Great advice. We mostly use ATM these days, but when you do have to change money, I agree, don’t ever d it at an airport.

  6. Juergen December 31, 2012 at 8:54 pm #

    Well, three things we do
    1.) check, before entering a new country, the exchange rates online, xe.com is good for that (you will get feeling how much real world rates differ from internet rates).
    2.) carry US Dollars in small notes. We are not US American, hence this is a bit more significant to mention. US$ almost always work as emercency cash if you’re stranded.
    2) if you have to, change only some pocket money (to get you into the next city or over the weekend) at you point of entry. Change your spending money in the city or get it from an ATM; in many countries money changers are legit and offer much better rates than banks do – inform yourself beforehand.

  7. Jennifer January 2, 2013 at 6:58 pm #

    Great advice! We always use ATMs these days and try to just take out what we need as we go.

  8. World Traveller January 14, 2013 at 12:34 pm #

    The best is to use a prepaid travel money card.The purchasing exchange rate is fixed at the time you purchase the currency, so when a currency is particularly weak, it makes good sense to load your card and benefit from the better rates.

    Regularly adding lump sums regularly to card is also a great way to budget for your holiday. By the time your holiday arrives, your holiday spending money will already be budgeted for.

    • Michael Hodson January 17, 2013 at 4:47 am #

      For sure, there are tons better ways that exchanging money, but I just wanted to give a tip for those that still do the money exchange thing. Plus, anytime you are leaving a place with excess money in hand, you will be in the situation where you need to exchange.

  9. Pauline February 3, 2013 at 6:45 pm #

    I use a card that has no ATM fees so on the last days I try to withdraw as little money as possible, then spend it on chewing gum or toothpaste, whatever you need is better than losing money on the exchange rate. The last 6 months trip I took around Europe was on a motorcycle so it was easy to leave each country with $0, we just filled the tank with the exact amount of cash left.

  10. Global Nomads June 10, 2013 at 7:09 am #

    A good thing to check is also that they actually buy and sell the currency with the rates they publish. It has happened to us a few times that they refused use the rates they had published, and said they are merely informative (read scam). If one of the values is fake, then you to judge how good the transaction is with the gap. You can avoid all that by travelling moneyless.

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