Saving vs. Investing: What’s the Difference?

The Difference between Saving and Investing

For anyone looking to build wealth, secure their future and achieve financial independence, it’s important to understand the difference between saving money and investing money.

Saving money involves setting aside a portion of one’s income for future use, usually in preparation for unexpected expenses. Investing involves putting money into various assets with the expectation of generating a larger return or profit over time.

Therefore, the purpose of saving money is more for short-term needs where a person maintains a certain level of liquidity in case unforeseen expenses arise.

On the other hand, investing is a longer-term endeavor. While investing usually carries a higher degree of risk, it offers the potential for higher returns over time with the goal of having enough wealth to live comfortably long after retirement and also to leave behind for loved ones to inherit after death. 

Benefits of Saving Money

Saving can be used as an emergency fund: Saving allows individuals to build an emergency fund, which acts as a financial cushion to cover unexpected expenses such as medical emergencies, car repairs, or sudden job loss. Financial advisors often recommend having three to six months’ worth of living expenses saved in an easily accessible account for such contingencies.

Savings can help in controlling debt: Savings can be used for short-term financial goals such as purchasing a car, funding a vacation, or making a down payment on a home. A carefully planned savings strategy can help you minimise the loans you’ll need to take for these expenses.

The money saved for these purposes is typically held in easily accessible, liquid accounts such as savings accounts or money market accounts.

Savings can help in preserving liquidity: While savings may earn minimal interest, the primary objective is to ensure the safety and immediate accessibility of your funds if needed.

Benefits of Investing

Wealth Accumulation: Investing is instrumental in accumulating wealth over the long term. By allocating funds to investment vehicles such as stocks, bonds, mutual funds, real estate, or alternative assets, individuals can achieve higher returns than what savings accounts usually offer.

Retirement Planning: Investing is important in retirement planning, allowing individuals to build a substantial nest egg to support their lifestyle during retirement.

Hedge Against Inflation: Historically, returns from investment vehicles like stocks and real estate have outpaced the rate of inflation, helping investors maintain the value of their wealth. Granted, having a sound risk management strategy is crucial when aiming to achieve returns higher than the rate of inflation.  

Which should you prioritise, saving or investing?

Responsible planning involves both saving and investing and it is always a good idea to obtain independent financial advice to achieve both these goals 

Savings are important to ensure you have sufficient liquidity in ‘worst-case’ scenarios. Setting a liquidity threshold through savings is important to avoid getting caught out by unexpected expenses as much as possible and to avoid having to whip out your credit card as a temporary relief to make ends meet. 

Investing is crucial for your long-term financial independence, especially after retirement. The last thing anyone would want is to worry about their finances when there’s no longer a stable income stream through work. Ideally, a person is comfortable and ready to enjoy their life after retirement.

Are pooled mortgage funds more suitable for short-term or long-term planning?

By its nature, a pooled mortgage fund is considered an  investment. They are classified as higher risk than traditional savings accounts. On the flip side, pooled mortgage funds target higher returns, just like other investment vehicles.

Whether or not an investor uses pooled mortgage funds for short-term or long-term investment goals will boil down to the needs of the individual investor.

A look at APG’s Pooled Mortgage Fund  

APG’s pooled mortgage fund, the PMAC Trust, is used to finance various loans for small and medium-sized enterprises (SMEs) to provide finance solutions for a diverse range of business purposes. 

Typically, APG’s loan portfolio consists of around  30 secured loans. Investors receive payouts in the form of quarterly distributions based on the interest payments made by borrowers. 

This structure provides instant diversification as your investment risk is spread across multiple loans. In the event of a borrower defaulting, the performance of other loans in the portfolio remains unaffected. 

Moreover, because all loans are secured by Australian real estate, in the event of a borrower defaulting, the security property can be liquidated in order to recover the amount lent out. For more details into APG’s procedures for loan recovery and risk management, you may access our article: “Investor FAQ: What happens if a borrower defaults?“

One of the key features of APG’s pooled mortgage fund, PMAC Trust, is that it has no lock-in period and no application or exit fees. In that regard, APG’s pooled fund is a flexible investment where an investor can have the option to use the fund for short to medium term investment goals or maintain the investment for the long term.

An investor can choose to receive passive income each quarter for additional income streams. And if there’s any event where the investor will need to access their capital, they can do so by submitting a redemption request at least two weeks before the end of each quarter for a full or partial redemption.

For those with long-term investment goals, investors may opt to compound their interest via the Distribution Reinvestment Plan (DRP).

If you are interested in APG’s pooled mortgage fund and would like to learn more, feel free to contact our investor relations team and they will gladly answer any of your queries.

The information in this article is of a general nature and does not constitute professional advice. Always seek professional advice in relation to your specific situation. The returns mentioned are not guaranteed.

If you have any questions about investing in private mortgages then please send us a message via our Contact Page.