Posted by With a new baby coming in 2023, our focus is to survive maternity leave (and first year parenthood!), navigate through a hefty variable mortgage, and save a bit into RRSP to manage taxable income.
Macro Outlook: significant interest rate increases have stopped
If you believe the recent Bank of Canada announcement, interest rate hikes are paused for now. At least to see if the cumulative rate impacts will get inflation back down to 2%.
(Although when I refinanced my variable rate mortgage in 2021, I also trusted the BoC’s interest rate guidance of no hikes. It didn’t turn out so well.)
Fool me once, shame on you. Fool me twice, shame on me.
Despite that, this time around, I am inclined to believe rates have tapered:
- The hard statistics on national employment rates and GDP growth still exceed expectations on a backward-looking basis. However, I am seeing and hearing white collar industries starting to pull back on forward-looking spending. This includes cutting back on non-core projects/costs, offering less aggressive compensation packages for talent, and even more extreme, layoffs. These types of changes take time to roll through the economy and show up in the hard data. So I am expecting 2023 data to come in more muted than 2022.
- Wages have not caught up with inflation rates. In a tougher 2023 economy, employers will be even less inclined to increase wages. This will pressure the low/medium income households even further, as income doesn’t rise with the cost of living. (Prices are unlikely to deflate back to pre-pandemic levels, so the cumulative inflation impact is permanent.) This paradigm can’t last forever without something breaking in the economy or society.
It is possible that the BoC has another 25bps or 50bps rate hike in 2023. But I believe the worst of the rate hikes is over.
Personal Outlook: Baby LJ and a year-long maternity leave
From a strictly non-financial perspective, Mr. LJ and I will need to learn how to be first time parents! Baby LJ is expected to join us any time now. So 2023 will be a year of emotional highs and lows, with a heavy dose of sleeplessness and immense joy.
We are definitely ecstatic to add a new member to the LJ Family. But my financial brain has a difficult time accepting that a 12-month maternity leave will negatively impact our long term financial goals. So the best thing we did was spend 2022 preparing.
Our main focus was growing our emergency fund (aka Cash Hoard, aka Baby Fund) to offset the lost income during maternity leave. Since summer 2022, we diverted all non-employer matched investments and excess cash to grow our cash stash. Our emergency fund was initially at a 4x monthly expenses and ballooned to 8x by the end of the year.
When we file our taxes in spring 2023, we expect to receive another significant tax refund. This should grow our Cash Hoard / Baby Fund to 12x monthly expenses. All of this is being held in a high interest savings account to be drawn down every month to simulate a “paycheque” to support monthly expenses.
Between maternity & paternity employment insurance payments, a modest employer top-up and anticipated lower expenses, I’d expect to only draw down cash equivalent to 4-6x monthly expenses.
Any remaining cash from our Cash Hoard / Baby Fund will revert back to our usual emergency fund at 4x monthly expenses. Any excess cash above 4x monthly expenses will be used for investments in 2024. (Since we diverted cash from investments to grow the cash hoard in 2022, it’s only sensible to reinvest any leftover cash.)
Asset Allocation
Just like last year, we will maintain our asset allocation at 100% equities. Since we have ~2 decades until retirement, we need our investments to grow and outpace inflation. We were also unfazed by the dips in the equity markets where we lost 9-10% value in 2022. This proves to us that we are comfortable with this level of equity risk & volatility.
From a country allocation, we will stick to what we had in 2022 as we see no reason to deviate:
- Cash/Bonds: 0%
- Canadian Equities: 26%
- US Equities: 42%
- International Equities: 32%
All the equity allocations will remain in a diversified ETF base, without leaning higher (or lower) on any particular sector.
2023 Financial Goals
For 2023, our key financial objective is to stay afloat with our monthly expenses using our “cash hoard baby fund”. Unlike 2022, maximizing savings will not be the key priority. Our goals in priority sequence:
- Fund any monthly expenses with our “cash hoard baby fund”: Mr. LJ’s paycheque and maternity EI payments should fund a majority of the expenses. We are treating the “cash hoard” like a paycheque: we will transfer cash into our chequing account each month to support monthly expenses.
- Max contributions on plans with employer top-ups: such as pension plan matching and employee stock purchase plans
- Increase lump sum payments on our variable mortgage to keep to a ~20 year amortization period
- Grind down Mr Loonie Journey’s RRSP contribution limit to manage his 2023 taxable income. This is critical, as there were two one-time payments (severance and signing bonus) that significantly increased his 2023 taxable income. Since we don’t expect Mr. LJ’s taxable income to be this high again for years, we should maximize the benefits of RRSP deduction by reducing his income closer to his historical tax bracket
- Start Baby Loonie Journey’s RESP in Q4 2023. Depending on how our financial situation is by fall/winter 2023, we will kickstart Baby LJ’s RESP with an initial $2,500 contribution. This allows us to benefit from the government’s free money (CESG). Since the wonders of compounding need time, we want to give Baby LJ’s RESP as much time as possible to grow
On only a single income (plus some government and employer benefits), it will be a tougher financial year. However, I am fairly confident that our pre-planning with our cash hoard will leave us in a comfortable spot. We have left some room for error and unexpected events, and can dip further into our emergency fund if needed.