Financial Literacy — Washington State Commission on Hispanic Affairs

The state of financial literacy in the Latine/Hispanic Community

To be financially literate is to know how to manage your money. This means learning how to pay your bills, how to borrow and save money responsibly, and how and why to invest and plan for retirement.

Financial literacy is a wide-ranging term that essentially applies to an understanding of one’s economic situation. It can include everything from understanding what is needed to buy a house to being able to develop a sound retirement plan.

Honing financial literacy can be particularly important for ethnic groups in the U.S. who are at an economic disadvantage. This includes the Latinx community, with Hispanic families owning a median of just 20% of the wealth held by a typical white family.

Hispanics have faced many disadvantages in the U.S. that date back decades, and instead of improving, those problems have only been exacerbated in recent years following the Great Recession and COVID-19 pandemic.

Many of these issues, such as the wealth and retirement gaps, cannot be solved on an individual level and would require broad, systemic changes for everyday Hispanic Americans to see a real difference.

But understanding financial literacy — and some of the causes behind these problems — can help better recognize where the largest areas of concern are and what resources are available to assist.

Explore the following topics to learn more about those areas.

One massive problem that the Latinx community in the U.S. faces is the wealth gap.

Simply put, Hispanics just have less money than the average white American. And they have few opportunities to close that gap.

“A big part of the problems that Latinos face is income. They tend to be over-represented in occupations that are typically low wage,” Susana Barragán, a policy analyst with UnidosUS, told Annuity.org.

“They also typically don’t have access to benefits like paid family medical leave, retirement accounts, health insurance, and so all of that really compounds to the wealth gap that exists for Latinos.”

According to the St. Louis Fed, the typical Hispanic family owns a median of $38,000 of family wealth, which is just a fraction of the median amount of $184,000 for a white family. Overall, 76% of Hispanic families have less wealth than the typical white family

This is a massive gap that cannot be closed overnight, and many different factors have played a role in its buildup. But one major barrier is education.

There is a strong correlation between education and wealth, with those who receive a higher education often having a better shot of building up wealth. But Hispanic Americans have a more difficult path to receiving that education.

According to the Student Borrower Protection Center, 72% of Latinx students have to take out loans in order to attend college, compared to 66% of white students.

The lack of wealth creates a cycle that can repeat over generations. Members of the Latinx community have less money, so fewer of them can afford to attend college and those that do take on debt at a higher rate.

Since fewer of them can attend college or do so without entering debt, the community ends up with less money than white Americans. That cycle causes the wealth gap to grow over time.

There is some potential long-term hope for wealth accumulation among the Latinx community.

According to a McKinsey & Company study, Latinos who are born in the U.S. tend to have higher wages and more intergenerational mobility than those born outside the U.S.

“There’s been some good things that have been happening but not to the extent that we would want,” Barragán said. “But if you start looking at intergenerational mobility and generational wealth, Latinos are actually fairing pretty good.”

But despite signs of upward momentum, there are still concerns. The Latinx community still make up a large size of low-wage jobs, and the McKinsey & Company study found that Latinos continue to fall behind white Americans and are collectively underpaid by $288 billion per year.

When looking at the wages and salaries of individual workers, there remains a significant discrepancy between what Hispanics and white Americans earn.

According to the U.S. Department of Labor, the median annual earnings in 2021 for Hispanic men were $45,822 — more than $15,000 less than the median earnings for white men.

The median earnings for Hispanic women lagged heavily as well, coming in at $39,511 and more than $10,000 lower than the monetary figure for white women.

Part of the issue, according to Barragán, is that members of the Latinx community remain disproportionately employed in industries and jobs that do not provide the same level of earnings as traditionally higher wage fields.

“Once we are able to raise Latinos’ level of income, that would really open up the venue for many other things,” she said.

“And that doesn’t necessarily mean bring them up to what’s traditionally high-wage jobs today like lawyers or doctors. We just need to make sure that the occupations that they’re disproportionately employed in are good quality jobs that pay decent wages, that have decent benefits.”

Unsurprisingly, the wage discrepancy that individual Hispanic workers face has created a significant difference in the earnings of families as well.

This gap is also exacerbated by the fact that Hispanic households can be larger and multigenerational, meaning that money is split multiple ways.

The Pew Research Center found that 23.4% of Hispanic families live in multigenerational households, compared to just 13.1% of white families. Families in the Latinx community have less money for each household even though that money often must be divided to support more family members than you would see in a typical white household.

Hispanics make up more than 18% of the U.S. population but own only 6% of employer firms.

Like other categories, Hispanic representation is lacking in business ownership. The McKinsey & Company study found that Hispanics make up more than 18% of the U.S. population but own only 6% of employer firms.

Hispanic-owned businesses also have a slightly lower success rate, with 13% closing within the first year compared to 10% of white-owned businesses.

A potential part of the problem is that Hispanics are less likely to use bank loans to start businesses.

“Once we are able to raise Latinos’ level of income, that would really open up the venue for many other things.” Susana BarragánPolicy Analyst with UnidosUS.

“Both because of cultural norms but also because of that income problem we talked about, Latinos are more debt-averse and they actually don’t like accumulating debt,” Barragán said.

“You would think it would be great, but obviously the way credit underwriting is done, and credit scores are calculated, you need to be able to show a history of credit.”

But in the last decade there have been signs of growth in this area and that change could be on the horizon. According to the U.S. Small Business Administration, one in four new businesses are Hispanic-owned. The growth of private businesses that have at least one employee other than the owner among Hispanics increased more than twice as fast as the national average from 2012 to 2017.

A critical part of financial literacy is understanding what is necessary to build a successful retirement plan. But unfortunately for many members of the Latinx community, the tools and resources to plan for retirement are not widely accessible.

According to research by Morningstar, only 31% of Hispanic households with employment income participate in a retirement plan, compared to 51% of white households.

Part of the issue is that many members of the Latinx community are in jobs or fields that do not offer robust benefits or options to save for retirement.

“Benefits are actually about a third of the wealth that Latinos have, so if you don’t have access to those benefits, it really sets them back,” Barragán said.

The lack of opportunities to save is naturally a major issue since saving for retirement is critical. An added issue, according to a study from the Social Security Administration, is that Hispanics also have a greater life expectancy than other age groups.

The fear of outliving your savings is real for even the wealthiest subsections of the U.S., and Hispanics face the double-edged issue of already often lacking savings and living longer on average. The Social Security Administration found that lack of access to a work retirement program was a big part of the problem.

And the savings that some members of the Latinx community do have are often not sufficient for a secure retirement. According to a fact sheet from UnidosUS, the average savings in a retirement account for working Latinos are less than one third that of the average white worker.

Less than 1% of Hispanics have retirement accounts that are equal to or greater than the value of their annual income. UnidosUS found that the median retirement savings for Hispanics of all age groups was $0 as well.

While many of the wealth gap and wage issues that the Latinx community faces cannot be solved without large-scale change, financial literacy can help to make differences on a small level.

UnidosUS found that 10% of Hispanics don’t contribute to a retirement savings account because they haven’t thought about it.

This problem could also potentially grow as the Latinx community makes up a larger and larger share of the U.S. According to the Pew Research Center, the Latino population reached 62 million in 2020. That accounts for 19% of all Americans. That growth has been rapid, with only 35 million Hispanic Americans as recently as 2000.

While most of the financial literacy problems that the growing community faces cannot be solved overnight, one pressing area surrounds housing. The stigma around taking on debt within the community has helped contribute to lower credit scores.

According to data from Brookings Institution, the average credit score of a Hispanic homebuyer is 701, compared to 734 for the average white homebuyer. This can cause two problems.

The first is that it makes homeownership less attainable for some members of the Hispanic community, forcing them to rely more heavily on apartments and rentals.

But it also leads to an uptick in unusual and riskier financial situations. According to an article from NPR, more than a third of Latino households used a financing option riskier than a traditional mortgage in order to buy a home.

Financial literacy can play a role in helping to better understand some of these situations and the potential drawbacks of opting for risky financing options.

Work cited: Simmons, C. (2022, December 5). Financial Literacy in the Latinx Community. Annuity.org. Retrieved January 27, 2023, from https://www.annuity.org/financial-literacy/latinx-community/

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