Personal Finances of US Hispanics

Personal Finances of U.S. Hispanics

Most people in the United States work in order to earn money, which can be used to meet daily needs such as food and shelter. One's earnings is finite, but there is an infinite number of ways in which one can spend money. This requires some measure of financial planning. This is further complicated by at least a couple of other major issues ---

In this consumerist society, one can make obtain loans to make purchases. The loan can be paid back in installments over a fairly long period of time. There are many specialized types of loans, such as mortgages (for houses), auto loans (for automobiles), credit card loans (for unspecified purchases), and so on. There is a highly competitive market for these loans, so that the consumer can choose among various interest rates and terms. However, it behooves the consumer to obtain these loans wisely such that he has the ability to repay the loans with his earnings.
In this society, one is not expected to work through one's entire life, as one is expected to retire after reaching a certain age. One's regular income is discontinued after retirement. Although the Social Security program provides some retirement income, this is typically much less and sometimes quite inadequate. It is therefore up to individuals to make savings for their retirement when they are still young.

We will draw on some research data taken from the Total Audience Survey conducted by Magazine Metrics in 1997. This is a mail survey of 18,100 adults (age 18+) drawn as a representative of the total population in the USA. In the next table, we show the biggest financial concerns among Hispanic and Total US adults. Basically, the differences between Hispanics and non-Hispanics are not too great. We note that non-Hispanics are slightly more likely to be concerned about covering monthly expenses, whereas Hispanics are slightly more likely to be concerned about saving for retirement and their kids' education. But the differences are not large enough to infer that a hedonistic gap exists.

Biggest Financial Concerns Among Hispanic and Total US Adults

Financial Concerns	% Hispanic Adults Agree	% Total Adults Agree
Saving for retirement	43%	36%
Paying off loan or credit card debt	41%	38%
Covering monthly expenses	38%	42%
Saving for kids' education	28%	22%
Saving to buy new home	17%	15%
Saving to buy new car	17%	16%
Saving for other major purchase	16%	13%
Healthcare/eldercare costs	16%	20%

(source: Total Audience Survey, Magazine Metrics)

Financial planning requires that a portion of the current income be saved aside for future purposes. This means that the saved money has to be placed somewhere. Aside from under the mattress, the money can be placed in any number of investment instruments --- interest-bearing bank accounts, certificates of deposit, treasury bills, stocks, bonds, futures, options, mutual funds, real estate properties, Florida swamp lands, etc. Each of these financial instruments has its advantages and disadvantages. For example, U.S. treasury bills have low yields, but they are tax-free and guaranteed by the government; as another example, trading in options can generate huge returns, but it is definitely not for risk-aversive, faint-hearted people. The following table shows the investment objectives of Hispanic and total U.S. adults. The Hispanics and non-Hispanics are not much different from each other.

Investment Objectives for Hispanic and Total US Adults

Investment Objectives	% Hispanic Adults Agree	% Total Adults Agree
Income for retirement	36%	35%
Long-term growth/capital appreciation	32%	30%
Tax savings	22%	18%
Safety of capital/principal	16%	15%
Additional current income	13%	13%
Stay ahead of inflation	11%	10%
Short-term gains/trading profits	6%	5%

(source: Total Audience Survey, Magazine Metrics)

Not everybody has the same set of concerns, priorities, capabilities and objectives. People are in different circumstances --- age group, income bracket, earned social security credit, medical condition, personal health, parents to take care of, children to provide for, loans, debts and mortgages to service, etc. Even for people with the same portfolio of concerns, priorities and capabilities, the solutions may be radically different because of different financial savoir-faire and preferences.

We took the Hispanic sample in this survey and applied the K-means algorithm to create three clusters. By design, the financial concerns and investment objectives are more similar among members of a cluster and more dissimilar from members of other clusters. In the next two tables, we show how these three clusters of Hispanics differ in terms of financial concerns and investment objectives.

Biggest Financial Concerns of Hispanic Financial Clusters

Financial Concerns	Group 1	Group 2	Group 3
Saving for retirement	91%	61%	41%
Paying off loan or credit card debt	72%	33%	32%
Covering monthly expenses	53%	31%	35%
Saving for kids' education	76%	33%	6%
Saving to buy new home	33%	15%	11%
Saving to buy new car	33%	17%	12%
Saving for other major purchase	30%	14%	13%
Healthcare/eldercare costs	30%	13%	13%

(source: Total Audience Survey, Magazine Metrics)

Investment Objectives of Hispanic Financial Clusters

Investment Objectives	Cluster 1	Cluster 2	Cluster 3
Income for retirement	31%	80%	15%
Long-term growth/capital appreciation	22%	80%	19%
Tax savings	7%	63%	5%
Safety of capital/principal	7%	63%	5%
Additional current income	4%	28%	10%
Stay ahead of inflation	3%	34%	3%
Short-term gains/trading profits	4%	12%	4%

(source: Total Audience Survey, Magazine Metrics)

The next table shows the demographic compositions of the three Hispanic financial clusters.

Demographic Composition of Hispanic Financial Clusters

Demographic Characteristic / Classes	Cluster 1	Cluster 2	Cluster 3
Sex Male Female	56% 44%	56% 44%	46% 54%
Age 18 - 24 25 - 34 35 - 49 50 - 64 65+	4% 22% 56% 13% 7%	4% 27% 43% 13% 13%	11% 18% 39% 17% 16%
Education Less than high school High school graduate Some college College graduate Post-graduate studies/degree	18% 41% 21% 11% 9%	9% 24% 28% 23% 17%	16% 42% 25% 9% 9%
Employment Full-time Part-time Student Not employed Retired	78% 1% 3% 5% 13%	61% 10% 9% 5% 16%	54% 6% 3% 15% 23%
Personal Income $20,000< $20,000 - $29,999 $30,000 - $39,999 $40,000 - $49,999 $50,000 - $59,999 $60,000 - $74,999 $75,000 - $99,999 $100,000 or more	45% 16% 12% 11% 8% 3% 3% 3%	44% 18% 13% 9% 10% 2% 2% 2%	63% 13% 10% 4% 4% 2% 3% 1%

(source: Total Audience Survey, Magazine Metrics)

Here is the how we characterize these Hispanic financial clusters.

Cluster 1 (20%): They are more concerned about all of the issues --- retirement, children's education, debts, expenses, etc. More than half of them are in the 35-49 age group, at a time when they have to be concerned about short-term issues (expenses, debts), mid-term issues (children's education, home purchase, auto purchase) as well as long-term issues (retirement), all constrained by a fixed income. To the extent that they have money to invest, their objectives are simply long-term growth for retirement purposes.
Cluster 2 (28%): They have less concern about the issues than the people in the first cluster. They are better educated and therefore likely to be more sophisticated and learned about personal finances. They probably have better financial plans in place already, with a balanced portfolio of various investment strategies. So it is not as if they do not care about issues such as retirement and children's education, but they have plans in place that can take care of them.
Cluster 3 (52%): They have the least number of issues to worry about, being concerned mainly with making current expenses and loan payments. Their personal income is the lowest of all the clusters, and there are more of them not employed or retired. Agewise, they have more of the youngest as well as the oldest by comparison. So they in fact consist of two sub-clusters insofar as the number one issue of retirement is concerned --- those who are still just starting out in life and have yet to worry about saving for retirement, and those who are now already past or near the retirement age that long-term savings planning is no longer applicable. Investments at this time may seem irrelevant to them.

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(posted by Roland Soong on 2/11/00)

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