How to manage your money while backpacking or taking a gap year

Whether your grand backpacking travel plans involve a visit to every continent on earth in a six month period or you’re planning on a single destination for your gap year adventure, one thing you’ll definitely need to do is transfer money into another currency from the country that’s on your passport.  

There is no one best way to manage your money when you are living or travelling in another country but there is a way to do it that will mean more money in your pocket - and if you’ve ever tried living on $20 a day for 12 months you’ll know that every single cent counts, so don’t waste it on totally avoidable things like bank fees and poor exchange rate margins.

Here’s a rundown of your money options:

Before you hit the road, if you don’t already have an Australian bank account set up, you’ll want to open one (that comes with online access) that you’ll use as a base for the bulk of your travel funds. You could even use a high interest savings account for this, and then have a basic transaction account that you transfer funds to when you need to make cash withdrawals.

It is a good idea for you to ensure that you give a friend or relative who is not travelling with you authority to the account so that if needed they can help you sort out issues from Australia, not a remote country where you are paying high international call rates or roaming charges.

Your bank account will come with an ATM card or a linked debit card. You’ll be able to use this while you are overseas at ATMs and if it’s a debit card, wherever Visa or MasterCard are accepted. But banks charge high overseas ATM fees (usually $5 per withdrawal) so if you are living overseas for an extended period of time this can end up costing you $260 a year in fees if you are only making one withdrawal a week.

In addition to this, your bank is likely to charge you a foreign exchange margin (usually 3%) of the withdrawal amount or purchase in AUD. So say for instance you withdraw $500 USD from an ATM in LA. You’ll be charged $5 AUD for the withdrawal. At an exchange rate of 0.75c, the withdrawal amount will be $850 AUD. On top of this you’ll pay a 3% fee ($25.50) bringing the total charges in AUD for that transaction to $875.50.

On a two week holiday it might be perfectly reasonable to pay this fee, but over a year that’s around $1326 in fees assuming the exchange rate doesn’t change. Ouch!

You can avoid this fee altogether by getting a debit card that doesn’t charge overseas transaction fees like the Citibank plus transaction account. You can see how much your current bank will charge you on our site with Mozo’s debit card fee finder tool.

Having a credit card is an overseas travel must. Even if you never, ever, plan on using it, it sure is nice to know that it is there to use in case of an emergency.  

Besides, in many instances you’ll find that when living life on the road you’ll need one. Many hotels, car rental companies and tours will require you to have a credit card imprint as a holding deposit. They will not allow you to use a debit or prepaid travel card for this purpose.

Many credit cards of course have high interest rates so if you do make purchases be sure that you plan on paying the balance off in full by the payment date.

In addition to interest charges, other credit card fees to think about when travelling for extended periods include:

• Annual fee

• Foreign exchange margin

• Rewards card fee

• Late payment fee

Make sure that prior to leaving you sign up to online bill statements or internet banking so that you can make payments, check for fraudulent charges and monitor your balance any time of the day or night.

See here for a list of travel credit cards. As with debit cards, most credit card providers will charge a foreign exchange margin on purchases so look for a card that doesn’t charge this if you are planning on using the card for most purchases.

These are the plastic version of a travellers cheque. Prior to leaving Australia you load up the card with foreign cash and then when you are in that country you pay for goods with this card or use the card at ATMs to make withdrawals in local currencies. Μany travellers find these cards great to help with budgeting. Because you have already exchanged your funds at a set exchange rate it becomes easy for you to manage your day to day expenses. For instance, using our earlier example, say you load up a card with $850 USD and you’re in the US for 15 days, you’ll roughly have around $56 a day to spend. Whereas if you use your debit card, because your money will get exchanged on the date of purchase you could find that you’re spending more money than you thought because the exchange rate you were charged was different to the one you were using to estimate your costs.

You can buy single currency and multi currency prepaid cards and most of these cards are reloadable so throughout your trip you can add new funds to them. Just be aware that sometimes it can take a few days for the funds to appear on the card and some providers will charge reload fees, which are often charged at a percentage of the load amount.

Some other fees to be aware of include:

• ATM fees

• Cross currency conversion fees if you use the card in a currency not loaded onto the card. These can be as high as 8%

Check out the range of prepaid cards available from major banks and money providers here

Say you’re staying in London for a year and need to buy some furniture for your new flat by making the obligatory visit to the local IKEA store. Sure, you can use your credit or debit card for this but another option, if you have a bank account set up in the UK is to use an international money transfer provider (IMT) and transfer funds between your bank account in Australia and your one in the UK.

Many IMT providers have services available for you to make one off payments or if you want to transfer across funds on a regular basis you can also do this. PayPal is also an option for smaller transfers but if you are transferring more than $200 it is more cost effective to go through an IMT provider.

Online IMT providers like OFX and TorFX are cheaper to use than big banks. Their fees are lower and they generally offer more competitive exchange rates which means that you’ll have more money in the bank.

Prior to leaving on your trip, it’s a good idea to set up an account so that when the time comes for you to make a transfer you can do it quickly and easily. The good news is that you generally don’t have to pay any setup or account maintenance fees on these accounts so it won’t cost you a thing to keep it open.

To compare rates, check out Mozo’s IMT calculator to see the cost difference between the big banks and online providers.