Why achieving financial independence matters for the Latino community

Published on Oct 27, 2021

Why achieving financial independence matters for the Latino community

It seems like every generation has to reinvent the wheel when it comes to gaining financial independence, but minorities — especially Latinos — often face challenges when creating a nest egg, retirement fund, or investment portfolio.  

According to a report from UnidosUS, one of the largest not-for-profit advocacy groups in the country, only 31 percent of Latinos participate in an employer-sponsored retirement plan. Retirement plans are critical in the path to achieving financial independence. So what are some other ways that Latinos can save money to build long-term wealth? 

Learn about the FIRE movement 

The FIRE (Financial Independence Retire Early) strategy empowers people to decide when to retire based on their savings instead of their age or professional standing. For Latinos, reconfiguring the traditional milestones for retirement savings might be in their favor since they statistically retire with a smaller account balance than other ethnic groups. 

To be able to retire at a relatively young age, FIRE practitioners save around 70% of their income while they’re working, and once they’ve saved their annual expenses times 25, then they can retire. In other words, if someone’s annual expenses total $40,000, they’ll need to save 25 times $40,000, which would be $1,000,000. To live off those savings, it’s important only to withdraw 4% a year, which is considered a safe withdrawal rate that will never deplete the principal after 30 years.  

For many first-generation Latino families, a common financial narrative is living paycheck to paycheck, but FIRE gives people a whole new relationship to money by making it a less precarious resource. 

Strategize a plan to minimize taxes 

Collectively, Latinos pay about $215 billion in taxes each year. Despite this momentous contribution, taxes can be a continuous obstacle in achieving financial independence. Starting a side business is one way to decrease taxes since business owners can deduct expenses such as their home office space, cell phone, and internet. 

People with high-deductible health plans can use a Health Savings Account (HSA) to pay their medical expenses and all contributions are tax-deductible, including those made by an employer. The same goes for invested HSA dollars. For example, any earnings resulting from investing HSA dollars in an ETF portfolio or mutual funds will be spared from federal income tax. 

The money saved from reducing taxes can go to more long-term savings goals and help create a sense of financial security, serving as an example for both someone’s family and the Latino community. 

Split monthly student loans into two payments to save money on interest 

Nearly 75% of Latinos take out students loans, compared to about 66% of white students, and the average Latino graduate is more than $40,000 in student debt. All this to signal that an effective loan payment strategy is in order. Splitting monthly student loans into two biweekly payments is an easy way to shorten the repayment timeline and minimize interest costs. Federal student loan programs will nick off a quarter-point interest for auto payments and many private lenders offer a similar incentive. Although the savings from autopayment might be extremely minimal, it’s all a part of the larger plan to build long-lasting wealth. 

Invest aggressively, depending on your age  

A good rule of thumb for someone of any age is to invest around 10% to 15% percent of their annual income. Investing aggressively is essential for people in their 20s and 30s who have enrolled in a 401(k) and are getting their footing in their career. Buying a S&P 500 index fund is a simple but strategic way to ease into investing, since it holds shares of the U.S.’s 500 largest companies. Using a 401(k) to create a diversified investment portfolio with both U.S. and international stocks only requires paying an expense ratio which is the cost of using the fund. For people in their 40s who have retirement closer on their horizon, a more stabilized, risk-reduced portfolio is in order. One approach is to allocate 87% of their investments into stock funds and 13% into bonds, and later when investors reach their 50s, they can shift that ratio to 72% stocks and 28% bonds.

Decades of investing not only ensures that future generations are financially comfortable but with that additional monetary power, Latinos can strategize ways to reinvest in small businesses in their community. 

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