When people look at living in another country, they often include a lower cost of living as a major factor in their decision of where to consider. That makes sense if you have a more limited income but do you factor in the possibility of fluctuations in the exchange rate?

It is not at all unusual for exchange rates to fluctuate by as much as 25%. Over the course of the last 10 years for example it has happened with the UK Pound to Euro and Canadian dollar as an example.

Brits currently living in other EU countries are now getting far fewer Euros(thanks to the Brexit vote) for their UK pound based pensions for example and people with a UK derived income but living in Canada have seen their income go up and down by 25% twice in the last 10 years.

This can happen with any currencies obviously and is not something you can easily predict. Even between currencies that are normally considered fairly 'safe', like the UK Pound, Canadian dollar, US dollar, etc. you can have these swings.

So how do you plan for it if you move to another country and have income still derived from your previous country?

The answer of course is that you SHOULD plan for such swings. Someone whose normal living costs in their new country equal only 50% of their income, have a 50% cushion available to them. If the exchange goes against them by 25%, they still have more than enough income to live on.

But what about the person who moves to a new country, expects a certain standard of living based on the lower cost of living in that country and can enjoy that standard of living using ALL of their income? They have ZERO cushion if the exchange goes against them. Their choices then become, lower the standard of living or go back to their home country.

You only have to look at Brits who left places like Spain in droves when the UK pound tanked against the Euro a few years back and are doing so again after the Brexit vote. They needed the higher exchange rate in order to afford their life in Spain. When their income dropped by 20%, they could no longer afford to live there!

So the clear message to anyone considering living in another country while having their income derived in their home country, is to plan for a CUSHION to allow for fluctuations in exchange. And to plan for a SIGNIFICANT cushion.

There is no problem knowing what to do with your money if you have more than you need. There is a huge problem knowing what to do if your income suddenly starts moving to less than you need.

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