As I mentioned in an earlier post, the Coronavirus scare, among other significant world events, has created volatility in both the stock market and the value of the U.S. dollar against the Mexican peso.
As a thrifty American retiree living in Mexico, I see a volatile market as an excellent opportunity to improve my financial well-being by acquiring more stock at lower prices and moving money to Mexico when I get the most pesos for my dollar. Basically the old buy low sell high strategy.
Today, the dollar reached it’s highest point against the Mexican peso in over a year, $20.35 pesos. That is a significant change from where it was back on February 18th, $18.55 pesos.
For the average American living in the U.S., the value of the dollar against other currencies doesn’t really mean much. The prices at the store aren’t affected in the short term and life pretty much goes on as usual.
But for Americans who live abroad on income originating from the U.S., taking advantage of dramatic shifts in the exchange rate can result in a lot more of the foreign currency in their pocket — and like I said, prices don’t change in the short term in response to these changes.
Capitalizing on Volatile Currency Markets
After my last article on the subject, some readers still seemed confused how to maximize their gains through currency exchange, so I’ll explain the strategy a little more.
Let’s say you’re a retired American couple living in Mexico and your combined retirement income from the States is $2,500 USD a month.
You’ll need to convert that money into pesos at some point to pay for things in Mexico. Let’s take a look at the popular ways to do that.
Relying Solely on U.S. Banks and Credit Cards (Not Recommended)
If you keep that money in your U.S. bank account and rely on your credit and debit cards to make purchases in Mexico, then you aren’t maximizing your annual gains from shifts like this.
For example, If you go shopping at a Mexican grocery store today and pay with your credit card, it will end up costing you fewer dollars on your credit card bill but that savings is small potatoes when compared to how well you could do.
Direct Deposit to Mexican Bank in Pesos (Not Recommended)
Some retirees open Mexican bank accounts and then have their social security or other retirement payment direct deposited in that account as pesos.
I never recommend this option because you’re not controlling when your dollars are converted into pesos. Over the course of a year, you could have ended up with a lot more pesos in that account by timing your transfers to take advantage of volatile currency markets like the one we’re seeing now.
Timing Larger Transfers to Take Advantage of Exchange Rates (Recommended)
In this strategy, you’ll keep a U.S. bank account and continue to have your social security and/or retirement payments direct deposited into that account. However, you will also open a bank account at Mexican bank and that’s where you will transfer your dollars when it is to your advantage to do so, meaning you’ll get the most pesos in the end.
The basic principle is the bigger the advantage, the larger the transfer.
The retired couple in our scenario is making $2,500 USD a month. Let’s say they spend that much in Mexico each year traveling and enjoying life. That’s $30,000 USD a year. They are going to spend that much money in Mexico anyway, so why not follow the basic principle to make the same amount of money go further.
The transfer of $10,000 USD would get you a lot more pesos today than it would back on February 18th:
You can do a lot with $18,000 pesos in Mexico.
The best way to transfer through third-party companies like Transferwise and not through your bank because they typically give much lower rates.
Let’s Wrap This Up
Whenever I write an article discussing the benefits of having a Mexican bank account, someone will inevitably leave a comment that they would not recommend doing it because Mexican banks are not insured like American banks are under the FDIC.
Contrary to what some folks believe, Mexico does have an entity very similar to the FDIC that protects your funds, it’s called el Instituto para la Protección al Ahorro Bancario, or IPAB for short. The amount insured is 400,000 UDIs or around $2,584,000 pesos.
Well, that’s it for today. I have to get back to following the currency market. Hasta luego.