The short answer is ABSOLUTELY YES, you need Mexican Pesos. You will need pesos for tips, souvenirs shopping, transportation like taxi/buses, tours, bar/restaurants, etc.
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Many parts of the Mexican Caribbean will accept payment in US dollars, so you don't necessarily need to take Mexican pesos with you on vacation. This is especially the case in All-Inclusive resorts.
It's recommended that you buy pesos before you land in Mexico, just in case you need the cash. According to this USA Today article, the most economical way to do this is to buy pesos from your bank in the U.S. Most banks will do this for free, especially if you're not withdrawing a significant amount of money.
The best currency to take to Mexico is the local currency, the Mexican peso. US dollars are also highly exchangeable at local banks and currency exchange offices. However, instead of converting physical banknotes, the cheapest way to pay in Mexico is to use a multi-currency travel debit card like Revolut or Wise.
Pesos, being the national currency of Mexico, will be accepted absolutely anywhere. US dollars will be accepted throughout the Cancun Hotel Zone, but the further you venture into 'real Mexico' the more problems you may find in using USD for everyday purchases.
The best currency to take to Cancun is Mexican pesos (MXN) as this is the official currency of the country and will save you money when paying for purchases. However, U.S. dollars are also widely accepted, so it's possible to use dollars when traveling in Cancun.
While still at home, you can exchange currency at your local bank. Experts suggest only changing enough to cover travel and transportation costs until you are settled at your destination, as the costs of exchanging money at home can be prohibitive.
It's up to you how much you tip, but the recommended amount in Mexico is between 10% – 20% (15% is a good standard in tourist areas) of the bill or ticket price.
All-inclusive resort tipping etiquette*Make sure to tip in Pesos or US Dollar bills, NOT COINS. US coins can't be traded in for pesos and are harder to locals for actually use. ^^ Oh, and there's a float up bar! ^^ My mango margarita with tajin rim!
For traveling (even on a backpacker budget), it is perhaps better to consider what 500 pesos (or $25 will buy). That is enough to rent a car for a way (minus non-specified expenses). It is also enough for dormitory accommodation in some of the cheapest hostels in Mexico City for two nights (around $8 per night).
I agree with $1,500-$2,000 with the activities you are planning. I usually bring the equivalent of $500 USD converted to pesos, along with another $1,000 in cash. If you estimate $100 per person per excursion (some will cost more, some will cost less), plus extra for tips and souvenirs, you should be good.
In Mexico, a good rule of thumb for tips is to leave 10-15% of the bill. 50 pesos would be a standard tip for a bill that was around 500 pesos. For example, if you go out for dinner and get drinks, you should expect to spend around 400 MXN. That would mean your tip would be between 40-60 MXN.
It's up to you how much you tip, but the recommended amount in Mexico is between 10% – 20% (15% is a good standard in tourist areas) of the bill or ticket price.
The first option you will have to exchange money is the International Airport of Cancun but even when you can find a great exchange rate beware of high transaction charges. You can obtain better local currency outside the airport and your hotel so just exchange money there unless you have no other choice.
I agree with $1,500-$2,000 with the activities you are planning. I usually bring the equivalent of $500 USD converted to pesos, along with another $1,000 in cash. If you estimate $100 per person per excursion (some will cost more, some will cost less), plus extra for tips and souvenirs, you should be good.