You look up the rate and it says 291. The money arrives and the arithmetic says 279. Nobody lied to you — you were reading a number that describes a market you are not a participant in, and there are two more numbers between it and your bank balance.
The four rates
| Rate | What it is | Where you see it |
|---|---|---|
| Interbank | What banks trade at, in size | News, search results, currency apps |
| Quoted | What your provider advertises | The transfer service’s home page |
| Effective | What you actually got, after everything | Your own arithmetic, afterwards |
| Planning | What you budget with | A number you choose, deliberately |
The gap between the first and the third is the cost of the transaction, and it is usually larger than the fee that was disclosed to you — because a portion of it is built into the rate rather than charged as a line item.
The rate to record
The effective one, always, and the way to guarantee you use it is not to think about rates at all when recording.
Record what left the foreign account. Record what arrived in the local one. Both amounts are facts you can read off statements. The rate is then implicit and correct, including every spread and fee, whether or not anyone itemised them.
- Never record the conversion using a rate you looked up.
- Never assume the two legs should be equal in value — the difference is the cost, and it is information.
- If you do the same conversion monthly, the effective rates over a year tell you what your provider is really charging.
That last item is the practical payoff. Twelve effective rates compared against twelve interbank rates on the same dates is the only honest way to evaluate a transfer service, and it is far more reliable than comparing advertised fees.
The rate to plan with
Deliberately worse than today. How much worse depends on what the rate has actually done.
- Look at your effective rate over the last twenty-four months.
- Take the worst one — not the average, not the median.
- Use it for every forward-looking number: your income floor, your buffer target, any commitment you are considering.
This will feel excessively cautious in most months, and that is the correct feeling. The planning rate is not a forecast. It is the level at which your obligations still work, and every month above it is surplus rather than relief.
If the rate has been trending your way
A local currency that has weakened steadily for years makes the two-year worst rate look absurdly conservative — it is from a period that feels like history. Use it anyway. A trend that has run for five years can flatten for one, and the cost of being wrong in this direction is only that you saved more than you needed to.
The rate never to use
The one on the news. It describes wholesale transactions between institutions and is not available to you at any volume you will ever transact.
It has one legitimate use: as a benchmark. The distance between the interbank rate and your effective rate is your total cost of converting, expressed as a percentage, and watching that gap over time tells you whether your provider is competitive. That is a real question and the interbank rate is the right tool for it.
What it is not is a number you can multiply your income by and plan a year around.
Frequently asked questions
Which exchange rate should I use in my budget?
For recording, the rate you actually received. For planning, a conservative rate — your worst over the last two years, not today’s.
Why is the rate I got worse than the one on the news?
The headline is the interbank rate, which is not available to individuals. Your rate includes a spread and often a fee on top.
How do I work out the rate I actually received?
Divide what landed in your local account by what left the foreign one. That single number includes every spread and fee, whether or not they were itemised.
Should I use an average rate for the year?
Only for looking backwards. For planning it hides exactly the bad months you are budgeting to survive.
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