Multi-currency financial planning for international investors

A financial independence plan compares your wealth with a target. If your wealth is spread across currencies and your target is in one of them, every comparison depends on exchange rates. Converting by hand is tedious and out of date almost immediately.

In the illustrative portfolio, about 18% of net worth is held in US dollars, euros and UAE dirhams. Those holdings all need converting before the plan can say how close the household is to its target.

Your base currency is the one your plan is measured in. For most people it is the currency they expect to spend in after reaching financial independence. If you plan to retire in the UK, that is usually pounds sterling, even if much of your money is held elsewhere.

If you are not sure where you will live, choose the most likely option and revisit it. The choice affects how currency movements show up in your plan, not what you own.

Keep each holding in the currency it is actually held in, then convert to your base currency at current rates. That way you can check each value against its statement, and you can see whether a change came from the investment or from the exchange rate.

Exchange rates are notoriously hard to predict, and adding a forecast of them would make a long-term projection look more precise than it is. The usual approach, and the one Yield Clarity takes, is to convert at today's rates and accept that the result will move as rates do.

That makes it worth revisiting your plan periodically, and remembering that a currency movement can move your estimated FI date in either direction.

Currency risk is the chance that exchange rates move against you between now and when you spend the money. If your spending will be in pounds and part of your wealth is in dollars, a weaker dollar reduces what that wealth will buy.

There is no single right approach. Common positions include:

• Accepting the exposure as a form of diversification, especially in globally invested funds.
• Moving gradually towards your spending currency as you approach financial independence.
• Using currency-hedged versions of funds for some holdings, which reduces exposure but adds cost.

UK resident with US investments

Your ISA and pension are in pounds, but you also hold US shares. Your plan is in pounds, and the US holdings convert at the current rate.

Returning from working abroad

You have savings in dirhams or Singapore dollars and plan to return to the UK. Seeing everything in pounds next to your UK investments shows where you stand.

European base with global funds

Your base currency is the euro, but you hold a global fund priced in dollars and some UK investments. Each keeps its own currency and converts into euros.

Prices rise at different rates in different countries. Your plan's inflation assumption should reflect where you will spend. For UK spending, the Bank of England's 2% target and the ONS inflation figures are the natural reference points.

Each asset keeps its native currency and converts into your base currency at the latest available rate, refreshed once a rate is more than 12 hours old. Recorded history keeps the rate of its day; forecasts use today's rates and do not predict future movements. In the illustrative portfolio, FI-eligible wealth of £391,400 is built from holdings in four currencies. See inflation and currencies in the methodology.