Thursday, December 11, 2008

Dollars and (Common) Sense

Remember the movie Office Space and Michael Bolton's grand plan to steal the rounding error from every transaction the company made? For each transaction, the amount stolen was a fraction of a penny, but aggregated over thousands or millions of transactions, those fractions added up to a whole lot of dough. Then there's the decimal place debacle and the devious plan falls to pieces.

Dealing with exchange rates on multiple currencies on a round-the-world trip is a bit of the same mess as Michael, the diabolical but mathematically impaired software engineer. Every time you change currency, little bits of your carefully crafted budget are shaved off. Some of that goes directly to the bank or money changer doing the exchange. Some of it is legitimate rounding error, which goes right back to the bank on top of their service fee or commission. And some of it, like when the U.S. Dollar was tanking worldwide this time last year, is just bad luck.

In America it's easy to dismiss all of the Chicken Littles on Wall St, screaming that the Mighty Dollar is falling. But when you've based your whole trip budget on a fixed amount of cold, hard American cash, how the dollar is faring against the pound, yen, or baht becomes much more important. So I wanted to see just what the impact of last year's currency market crisis was on our trip.

When we were researching the trip, we used almost exclusively Lonely Planet guides. They're ubiquitous, everyone uses them, and, generally speaking, they're reliable. So even though we understood that the copyright date was only a couple of years old, we assumed that the exchange rate information was good. Not once did we think to double-check the exchange rate on a site like xe.com. So we planned our trip around a $50 USD per day budget.


What should have been common sense is that exchange rates fluctuate, particularly in developing nations like the ones we were going to be travelling in. While we were on the trip, I had the distinct feeling that our money wasn't going as far as I thought it should. It could be that I'm a bad haggler, and that after one bad experience in a shitty hostel, we were going for top-of-the-line budget accommodations, but look at the data. Our money wasn't going very far at all in most of Southeast Asia (where we were before Feb 2, 2008), especially Thailand. Then we went to Sri Lanka, where the LKR was running much stronger against the dollar than it had in years. Finally, in India, Nepal, and Hong Kong, we were right on budget.

So our money wasn't going that far, but just how far was it getting us. In Thailand, on average, we were short $2.76 from our daily budget (valued on Sep. 19, 2007), which equates to about one small meal for the two of us, not including alcohol. What's worse is if you look at our value of our Lonely Planet-based budget in Nepal, a difference of $7.48, or two midday meals at the Hut including beer.



According strictly to the data, the total loss due currency fluctuations was $100.33, or just under 2% of our total budget. However, consider that that's 2 whole days worth of food, lodging and activities lost due to "market forces".

So what's the bottom line? First, before setting your budget in stone, use some common sense and double-check the current exchange rates. Second, it might not be a bad idea to add a couple of days of cushion to your overall budget. In the end, exchange rates are annoying but a fact of life. As long as you use some common sense (ahead of time), you'll be able to ride out any nastiness the market can throw at you.

1 comment:

Richard said...

Well ok, now that we've got the $$'s and Sense worked out, where are we going and when do we leave?

Nice analysis.

Dad