How to Put a Face to Your Money

By: Yolanda Rosich Clemente, CPA, CFP®, PFS, Popular Securities Financial Consultant

When you think about money, what comes to mind? Are you clear about what you want to use your money for? In this article, we will help you understand what it means to put a face to your money, the process to follow, and who can assist you, as well as other factors to consider. In other words, “preparing for the good and protecting from the bad.”

Close your eyes and reflect on your short, medium- and long-term dreams and goals, both personally and for your family. Some individuals aspire to buy a home, support their families, provide education for their dependents, travel, assist a relative, establish or grow a business, or engage in philanthropy.

Now, close your eyes again and consider what might happen if you were to lose your job, become ill, become disabled, or pass away tomorrow. Which people depend on you, and who would be affected? What would become of your business? If your children are minors, what would happen to them? Who will care for your parents or relatives? Who are you currently supporting? How will you secure a home for your family? Once you’ve identified these unique and personal goals, quantify how much you need to save for each one and create a plan. In other words, start to put a face to your money, aligning it with your personal goals or concerns. This is all addressed through the personal financial planning¹ process.

What does personal financial planning include?

Financial planning includes:

• Balance sheet analysis: Identify assets, liabilities, income, and expenses, which are crucial in the effective organization of your finances.
• Planning for dependent’s education: Project the costs of desired education (at all levels) and assess available options to cover costs.
• Income tax: Evaluate strategies to reduce the impact or tax burden on your income and assets.
• Asset allocation: Plan how to allocate your capital across various asset classes, including cash, bonds, stocks, and other categories such as insurance², annuities³, alternative investments⁴, and real estate; considering attributes, objectives and risks of each asset class.
• Retirement or financial independence planning: Establish strategies to achieve financial independence by your desired age while considering your life expectancy.
• Asset protection / Insurance: Assess the need for life, disability, and liability insurance that you, your family, or your business may require, among others.
• Estate and succession planning: Establish a plan to legally and financially prepare your family in the event of your death. Learn about essential legal documents (such as a will, a testamentary trust, a durable power of attorney, and a homestead certificate).

If you own a business—especially with partners—you should understand your Business Succession Plan in case you want to retire, become disabled, or pass away. This business plan should be aligned with your personal estate planning. Remember to also review the Shareholders Buy and Sell Agreement.

The planning process is an ongoing endeavor that thoroughly examines all these areas in an integrated manner while aligning available funds and income with established goals. Additionally, it should consider factors beyond your control, such as inflation, life expectancy, and the average return on your assets.

How to diversify your money?

Asset allocation consists of combining assets with different attributes, risks, and average returns. Thus, it is vital to evaluate which ones are appropriate for you.

Below are the asset classes and how to allocate funds to the different strategies or “drawers”:

• Cash: This is the most liquid and least volatile asset, making it the “safest” option. This includes bank accounts, credit unions, investment accounts such as money market funds, and short-term federal treasury notes. You should always maintain an emergency fund to cover between six months to one year of your current expenses.
• Bonds: These are fixed-income assets payable by an issuer, which can be the government, a government agency, or a private entity. This type of instrument is subject to credit risk, or the risk of the issuer’s inability to repay, and interest rate risk, which involves rate fluctuations after the money has been invested for the long term. This instrument is ideal for those seeking income with fluctuations in account value and principal based on the credit quality of the issuer. This includes certificates, bonds, notes, and fixed annuities with various durations.
• Stocks: Consist of shares in publicly traded companies. They offer greater long-term growth potential, but do not guarantee principal or maturity. Stocks serve as an ideal tool for pursuing long-term growth and are traditionally utilized through retirement plans and other personal accounts.
• Other asset categories: These include real estate, shares in alternative investments, private investments, and more aggressive investments with greater growth potential. They are generally less liquid and should be viewed as a long-term strategy, with an understanding of the risks involved. Variable annuities and Permanent Life insurance is also used in this category to protect loved ones and, in some cases, as a complement or supplementary asset to other goals through accumulation of cash values.

What are the best assets or strategies for you? Everything will depend not only on your goals but also on the available funds, the time horizon for achieving your goals, your risk tolerance, and other factors. The amount of money to invest in each asset category, as well as the necessary insurance and documents, depends on the financial goals and needs of each person or family. We should focus on our individual goals instead of being influenced by friends, family, or media. Therefore, it is advisable to have a team of advisors who can collaborate on a comprehensive plan that addresses all the mentioned areas.

It is ideal to have a liaison or financial planner, capable of collaborating closely with your accountant, attorneys, banker and investment and insurance advisors. It is important to consider the preparation and designations of your team. Today, there are multiple designations such as Personal Financial Specialist (PFS), Certified Financial Planner (CFP®), or Certified Private Wealth Advisor (CPWA®). We often hear about various financial advisors who do not necessarily approach planning holistically or who are not trained in all the areas encompassed by a plan.

What else should you know when managing your money?

You should be aware of the direct and indirect costs associated with each planning strategy. For example, consider purchase commissions, annual fees, early termination penalties, and additional expenses for guarantees. An intangible yet significant cost is the cost of failing to plan in a timely manner.

Additionally, there are questionnaires or programs to assess your risk tolerance. If you want higher returns, you must be prepared to accept greater risks and, most importantly, have more time. Conversely, if you seek high protection with low risk, you can expect lower returns.

As the saying goes, “Nothing is certain except death and taxes,” because even cash can be affected by inflation.

Lastly, consider the tax implications. Assess whether the instruments will yield interest earnings, dividends, or capital gains. Additionally, evaluate your options for tax exemption or deferral, both in Puerto Rico and at the federal level, by utilizing U.S. instruments, which are generally suitable for effective diversification.

As you can see, putting a face to your money does not depend on your age or the amount of money you have; you can do it very early in life. The sooner you do it, the better prepared you will be. You just need to be committed to yourself and your family, always with the support of your team of advisors.

I invite you to close your eyes and dare to start putting a face to your money right now.

At Popular One, our team of professionals has the needed preparation to guide you on this topic and assist you with other services such as managing your finances, banking relationships, and risks. For more information about products and investment advice, contact your financial consultant at Popular Securities or write to: popularone@popular.com.