Should I save in pounds sterling or euros? Does it make much difference?
March 29, 2011 2:11 AM   Subscribe

Should I save in pounds sterling or euros? Does it make much difference?

I work in Germany and I'm paid in Euros. However, I'm British, and have UK bank accounts. While I was working in the UK I got into the good habit of tucking some of each paycheck into my UK savings accounts some time ago and I have simply continued that habit. Recently though, it occurred to me that I might be better off opening a Euro savings account.

Is that the case?
Does it make much difference in the long term?
What advice can you give me?
posted by jonesor to Work & Money (15 answers total)
The banks are much much better than you or I at predicting what will happen with currencies over the long, short and medium term. They employ people whose job it is to figure this out. Then they set their buy/sell prices for currency conversion accordingly. Interest rates on savings in each country also take account of what is most likely to happen in the future with that currency.

In other words, you will never win by exchanging money into another currency in the hope it will do better. Much better off opening a Euro savings account if you are paid in Euros, and then at least you don't have to worry about conversion fees or spread.
posted by lollusc at 2:16 AM on March 29, 2011 [1 favorite]

I should clarify: you will never win by doing this as a long-term ongoing strategy. You might make a one-off gain here or there if you do it from time to time and get very lucky.
posted by lollusc at 2:18 AM on March 29, 2011

lollusc seems to be assuming you're actively trading back and forth. If I read this correctly, you're just asking about longer-term savings.

Is that the case

If the Euro outperforms Sterling, then yes. I have no opinion on this.

Does it make much difference in the long term?

It certainly could. I have a mate who is paid in USD, but saves in GBP (for historical reasons). He worries about exchange rates, but doesn't do a lot about it.

What advice can you give me?

Given that you're going to need euros to live, it may be simply more convenient to save in euros, and convert them in bulk to sterling when that is appropriate.
posted by pompomtom at 2:30 AM on March 29, 2011

Response by poster: I forgot to add: as far as I am aware there are no conversion fees to transfer between my bank accounts. The UK and Germany are both in the Single Euro Payments Area so transfers are treated as domestic.
posted by jonesor at 2:34 AM on March 29, 2011

British banks currently have embarrassingly rubbish interest rates. I can't speak for euro banks as they are multitudinous, but for a simple savings account, I'd be surprised if you could not do much, much better elsewhere.
posted by Sparx at 2:40 AM on March 29, 2011

lollusc. The size of daily currency transfers dwarves any attempt to manipulate prices by the banks. They do make bets on which way currencies will move in the future, but the idea that they can "set" current prices by so doing is just not true. They may be able to move the markets slightly in the very short term, but anything longer would be impossible. Currency markets are some of the deepest and most liquid markets in existence.

(paging Mutant, who knows more about this stuff than anyone else here...)

jonesor. Implicitly, if you save in £ or € you are taking a position on which of those is likely to be the stronger currency in the future. Right now the € is strong against the £, but that could easily change. There's no right answer to this question, you take a view and decide what to do based on that.

Also, I'd note that your bank is probably giving you a very uncompetitive exchange rate on your transfers from € to £. You'll probably save a significant amount by going via an FX broker, who will give you a much to h tighter spread on the transfer from one currency to another.
posted by pharm at 2:42 AM on March 29, 2011

I'm in a similar situation; I have savings back in Australia in AUD but for the last 3 years I've been earning and saving UK Sterling. I have never been able to decide if I should transfer back in to AUD.

There was a week back in 2009 where I seriously thought about it as the AUD had lost a lot of ground. but then you worry - well is it going to go down even further. Similarly the UK pound has been losing a lot of ground to the Euro in the last few years.

will it recover? hmm... will it rain next Thursday?

Personally I think that maintaining significant balances in multiple currencies is a reasonable form of personal "Currency hedging" - particularly if you are not sure which country you will eventually settle in.

so I would say - start saving the Euros in Euros.
posted by mary8nne at 2:42 AM on March 29, 2011

If you're asking about playing the currency market then, no, plenty of people will come here to tell you that you lack the information to make an informed decision. There are a couple other things to consider thoguh such as:

1. Where will you be spending this money eventually? Do you plan to go back to the UK? How and where you will eventually spend this has some bearing.

2. Diversity/Flexibility. I think its a good idea to hedge and have money in different stable currencies. That way, you can make decisions based on which currency is strongest at the moment. My wife and I have savings in Dollars, GBP and Euros spread across several banks. When we go on holiday or make a purchase we will often pay in the currency that is strongest at that moment.
I've also bought plane fares/hotels/etc online where if you switch between paying in GBP/Dollar/Euros you'll see that there might be an advantage in one vs. another.

3. "Dollar-cost-averaging" You could set up to buy X euros worth of GBP every month or so instead of Y GBP. That way, you buy more GBP when they are cheaper and less when they are more expensive. This strategy actually makes you money in a market that is doing nothing but bouncing up and down.
posted by vacapinta at 2:42 AM on March 29, 2011 [1 favorite]

Response by poster: Thanks for your advice so far, I am beginning to get my head around this stuff now.

To answer some questions arising:

I am not asking about playing the currency market. I'm not trading funds back and forth - I typically make a transfer of my excess pay packet once a month.

I'm not sure where I will end up living eventually but it is likely that I will live in the Eurozone for several years (at least 3) before returning to the UK. This is by no means set in stone though. I spend a 2-3 months a year back in the UK and the rest of the time in Germany or Sweden, where my partner lives.

Apart from day-to-day living expenses and the odd restaurant meal I don't really spend much money anywhere. I have no plans to buy costly items like a house, or a car. My big spends are on holidays a couple of times a year. Usually one in Europe, and another somewhere more exotic.
posted by jonesor at 3:53 AM on March 29, 2011

Short answer: this is not likely to significantly affect your financial situation for good or ill in either the short or long term.
posted by valkyryn at 4:48 AM on March 29, 2011 [1 favorite]

My guess is that, given the overall state of finances of both issuing entities, neither currency is likely to be a very good store of value for the next decade or so. It's quite likely you'll see fairly strong inflation in both areas. It'll be painted as 'goods going up', but it's really 'currency going down'. You might seriously want to consider diversifying your savings into other areas, like stocks and commodities. Don't overdo it in any one area, though; spread things out, and maintain good cash reserves for emergencies.

For your cash holdings, you could perhaps split them between pounds and Euros -- that way, you'll be a little more insulated from the foibles of either issuing entity.
posted by Malor at 4:51 AM on March 29, 2011

not a big deal - build up a EUR fund that functions as your near term emergency fund (like a few month living expenses), and since it sounds like the UK is the longer term destination save retirement funds/excess above the near term emergency fund in GBP.

You are just looking to keep you assets and your future liabilities matched. Any thing else is speculation.
posted by JPD at 5:08 AM on March 29, 2011

Save where you plan to withdraw.

Alternatively, if you want to diversify, put 50% in £ and 50% in Euro. The spread seems to be living between €1.10 and €1.20, so we're not talking about massive changes. You'll also see directional changes over time (most likely) and can reassess as need be.
posted by nickrussell at 5:44 AM on March 29, 2011

Malor makes a good suggestion- if you build up a decent chunk of savings, you can pull from whichever account is currently more valuable (versus the other) when you need cash. The recordkeeping to do this effectively might be difficult. Long term, I don't see any reason why those two currencies won't be mostly at par with each other.

Another thought is to keep the money in whatever currency you think you will need it to be in when you need it.
posted by gjc at 6:00 AM on March 29, 2011

You might gain or lose on the currency exposure either way, it's very difficult to predict, and you've said (smartly) that you're not interested in trying to work that exposure for profit. All good things.

So go for the higher rate, wherever it is. If you can get a higher interest rate with a Euro-denominated account, and it's comparably insured, that's the one I'd go for.

If at some point in the future you move back to the UK permanently and won't have any spending needs in Euros in the future then it might be worth reevaluating your Euro assets and deciding whether it makes sense to convert them all at that point or to wait. But that's a decision for down the road; it sounds like at the moment you have anticipated spending in both Euros and Pounds, so either one would work. Hence go for the rate.
posted by Kadin2048 at 9:30 AM on March 29, 2011

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