I'm in my late 20s. How do I spend, save, and invest?

It's time to invest. This article investigates the process to get started.

Whether you have a lump sum to invest, or youre starting afresh, the process of saving, spending, and investing remains similar. This guide applies to everyone but is specifically focused on individuals in the 25-35 age group. 

The steps are simple:

1. Budget
2. Assess your personal risk profile
3. Invest based on step 1&2

Budget [refer to figure 1]

When it comes to money management, we have to be intentional. It all comes down to having a system in place and executing that system with discipline. Budgeting in three simple steps:

a) List your income streams

There are two ways to improve your income: Increase the income of your main hustle or start a side hustle. Though the latter sounds more inspiring, I would suggest focusing on your main job by maximizing the utility and income from this stream.

b) List your monthly fixed and variable expenses

Work through the expenses on your banking app and identify exactly who and what youre spending your money on.

c) Re-evaluate your expenses

Where can you cut? Identify areas where you spend unnecessarily and commit to reducing your expenses in those areas. The more money you have left, the more you can save and invest.

Assess your personal risk profile [refer to figure 2]

A risk profile identifies the acceptable level of risk an individual should take when considering investment options. This process entails evaluating three aspects of risk: Risk required, risk tolerance, and risk capacity.

• Risk required:  Refers to the appropriate level of risk your financial goals demand. The more ambitious your goals, the higher the level of risk you must accept as there is a direct relationship between risk and return.  
   
• Risk capacity: Refers to your ability to take on risk. It depends on your personal financial circumstance, including factors such as monthly income, dependents, age, assets, and debt.   
   
• Risk tolerance: Refers to your willingness to take on risk. Are you a risk-seeking or risk-averse investor? Some people will invest more than 50% of their money in Bitcoin, whilst others wont touch it with a 10-foot pole. Theres no right or wrong it simply depends on your personality.

Based on the above-mentioned variables, you will be able to identify your risk profile. A low-risk investor is a conservative, cautious investor who is happy receiving lower returns for a higher degree of stability. A medium-risk investor is a balanced investor who wants healthy returns for a moderate level of risk. A high-risk investor is an aggressive, growth investor who is comfortable accepting a significant amount of risk for higher long-term returns.

Invest based on Step 1&2 [refer to figure 3]

Okay, youre ready to invest. The question is: in what?. Should you invest in Bitcoin, Naspers, or gold?  Maybe you should just keep your money safe in a bank account, or maybe you should buy an apartment and rent it out. As stated above, it all depends on how much money you have available to invest (Step1) and your risk profile (Step 2). The main asset classes available to investors, in order of implicit risk, include cash and cash equivalents, bonds, real estate, commodities, equity, and cryptocurrency.

The extent to which you choose to employ capital is an individual decision that is guided by your personal investment goals and risk tolerance. If youre very risk-averse, you will probably lean towards cash, bonds, and blue-chip stocks. Alternatively, if youre willing and able to take on more risk, stocks and crypto will probably constitute the largest part of your portfolio. 

The typical FinMeUp community member is between 25 and 35 years old. Age is an important guideline to consider when conducting asset allocation. The younger you are, the more aggressive your portfolio should be, as it is easier to digest and absorb losses at a younger age. As you get closer to retirement, your portfolio should comprise more conservative assets as you have less time to rebound in the event of a market downfall.