Posted by With Baby LJ joining the family back in February, it’s been a fast-paced year with sleepless nights mixed with endless joy! As I went onto maternity leave, we became a single income family for the first time and the 2022 planning really paid off.
Raising a kid is hard
Raising a baby is definitely the hardest thing I’ve ever done in my life.
The first 3 months after birth was rough. My body needed to heal, but a newborn’s schedule is relentless.
There were many days when I’m up at 12am and again at 4am. I saw countless sunrises. The lack of sleep was real.
It was during one of those sunrises that I thought “I finally understand why some mothers get post partum depression”.
Once Baby LJ slept through the night, our entire family life turned for the better. I was finally able to appreciate the joys of motherhood.
Raising a kid is expensive!
People tell me that raising a kid can be expensive. My experience is that it IS expensive, especially raising the first child.
There are a number of “hard goods” to invest in: bottle sterilizers & warmers, crib, stroller, and carseat. Some of these items can be purchased used, but things like the carseat should be new.
Then there’s the recurring “consumables” to buy: diapers, wipes, clothes, and formula. Formula, by far, was the most expensive item to purchase each month. We were fortunate to get a ton of hand-me-down clothes from friends.
And of course, there’s the lack of income due to maternity leave. This one was the most expensive of all the costs.
Recapping the Big Picture Stuff
From a financial perspective, 2023 was a year about executing the Big Picture plan set in motion in 2022.
1. From DINK to SISK … for a year!
In February 2023, I went on maternity leave. We went from a “double income no kids” status to a “single income single kid” family.
Emotionally, welcoming a child been the best change in our family.
Financially, it hurt. A lot.
But we came into the year prepared, having grown our “cash hoard baby fund” to bridge us through the leave period. (Employment Insurance is a great safety net, but is significantly below the income level required to sustain our recurring expenses.)
Overall, we lived within our expectations. Our cash fund was enough to tide us through the year without having to dig into any debt.
2. From 5.26% to 6.01% mortgage interest
For 2023 planning, I was expecting 25bps to 50bps of interest rate increase. We ended up with 75bps total increase, with a 6.01% variable rate. Ouch.
At a 6% rate, we started second guessing our decisions. Should we continue contributing to our investments in TFSA/RRSP? Or should we start diverting more cash towards the mortgage?
Upfront planning reduces emotional mistakes
It’s often easier to make a plan beforehand, instead of making decisions during an emotional moment. Unsurprisingly, I previously wrote about how to prioritize investments by location. In priority sequence:
- Company matching accounts; then,
- Tax-advantaged accounts; and lastly,
- Mortgages or taxable investments.
Since we still have some room in our TFSA and RRSP accounts, we should continue with investments.
It’s good to check whether our plan is still good
Back in 2022, I wrote about investing vs. repaying the mortgage. From a numbers perspective, we should compare the rate of return on our investments to the cost of the mortgage rate. Let’s check on the current numbers to see whether making investments would still make sense.
From the post, our investments are projected to make ~5.5% over the long term. It wouldn’t be accurate to compare this to the current variable mortgage rate of 6%. The current variable rate is just a cost at this point in time. This could go up or down over the life of the mortgage.
Since we intend to pay back our mortgage in 15-20 years, we should theoretically look to the 15-20 year mortgage rate to compare against our investments. Unlike the USA, unfortunately Canada doesn’t offer fixed mortgages with 15-20 year terms. While some lenders offer mortgage terms beyond 5 years, the rates are unreasonably high and are not useful comparables.
So we can either look at the historical mortgage interest rates, which we know may never be replicated again. Or we can look at the current 5 year fixed rates as a proxy, which can fluctuate in the future.
- Historical: Over the past 15-20 years, mortgage rates have been in the 5-7% range, excluding the ultra-low COVID era interest rates. While history is an interesting data point, it has little bearing on what the future rates will be.
- Current: The current 5 year fixed rate for uninsured mortgages is between 4.8-5.3%, depending on the lender. Since this rate is lower than the current variable rate, it would suggest that the markets are expecting the Bank of Canada to lower interest rates over the next 5 years.
Mathematically, investments earning ~5.5% is better than mortgage rates of 4.8-5.3%. This would still suggest we should continue with our investments.
3. Unexpected housing expenses
When we were house hunting a few years ago, there were many new property developments in the city. But we never wanted to live there because the area looked so sterile. The properties had giant houses but small yards. The trees in the yards were saplings compared to the older parts of our city.
We ended up being proud owners of our 50-year old house. We love the mature trees and developed neighbourhoods. The large yard is great for our dog to roam.
But old houses come with (more?) maintenance problems.
During the summer, we had a sewage backup in the basement. It was a crappy situation, to say the least.
Luckily, someone was in the basement just as it occurred, so the basement was not damaged.
Unluckily, the plumbers told us the backup was not a simple clogged pipe. Tree roots in our front yard had broken the clay sewage pipes between our house and the city sewage system. So any wastewater from our house came back into our basement.
We asked our neighbours and it seemed to be a common problem in the area due to the age of our neighbourhood.
It cost a few grand to replace the sewage pipes. And of course, it was not covered by our insurance policy. My insurance broker did upsell me to add coverage so future issues will be covered. I’ll chalk it up to “newbie homeowner lessons”.
Financial Goals Progress
To recap, our financial priorities for 2023 were:
| 2023 Goals | Year End Progress |
|---|---|
| Fund any monthly expenses with our “cash hoard baby fund” | 100% |
| Max contributions on plans with employer top-ups | 100% |
| Increase lump sum payments on our variable mortgage | 100% |
| Grind down Mr Loonie Journey’s RRSP contribution limit to manage his 2023 taxable income | 80% |
| Start Baby Loonie Journey’s RESP in Q4 2023 | 100% |
Our 2023 financial goals were relatively modest given our lowered income levels. We weren’t as focused on savings; there wasn’t any excess money! So it doesn’t surprise me that we were able to hit most of the financial goals.
- With a few one-time payments (severance, signing bonus) in 2023, we needed to max out Mr. LJ’s RRSP contributions to minimize taxes payable for the year. By December 31, we still have some more contribution room left. We’ve set aside some cash to contribute in February 2024 towards the 2023 limit. The reason for holding it in cash is for optionality. I am still on maternity leave until February, so want to have a bit of excess cash on hand in case we need it for anything else.
- On the mortgage, we’ve continued to increase our payments to match the variable rate increases. It’s been tough to achieve, but we continued with our mortgage repayment plans. For every interest rate increase, we upped our lump sum payments to match and maintained the amortization period to what it was prior to the rate hikes.
Net Worth Update
Consistent with our 2022 update, I’ll focus on the controllable and non-controllable net worth components to gauge progress.
Within our control
Goals: Of our 5 financial goals, we’ve already met 4 of them by year end. We have the cash set aside to hit our last goal of maximizing Mr. LJ’s RRSP account, too. Overall, we’ve done well.
Savings & Contributions: Excluding Baby LJ’s RESP, we contributed $57K to our investment accounts. The contributions were only to accounts that were employer-matched or to Mr. LJ’s RRSP account. This is significantly lower than our 2022 contributions of $123K, which was a high-saving year.
Asset Allocation: We are underweight in International Equities, with a little too much cash on hand. We should invest the cash into International Equities to get us back on target.
| Target Allocation | Q4 2023 | Acceptable Deviation (<2.5%) | |
| Cash (excl. emergency fund) | 0% | 1.1% | Yes |
| Bonds | 0% | 0.1% | Yes |
| Canadian Equities | 26% | 26.6% | Yes |
| US Equities | 42% | 43.3% | Yes |
| International Equities | 32% | 28.9% | No |
| Total | 100% | 100% |
Mortgage: We repaid $44K of our mortgage principal in 2023, which is significantly ahead of the $27K repayment in 2022. Contrast that with the $42K of mortgage interest we paid. Painful!
I had set a “vanity” goal of getting to an under $700K mortgage outstanding. So we tried to push more cash into our mortgage.
By the end of the year, we did achieve our “vanity goal”! Just another $700K to go!
Outside of our control
Portfolio Returns: For 2023, my portfolio was up +17% (vs. -10% in 2022). Mr. LJ’s was also up +15% (vs. -9% in 2022). While we generally invest in the same things, we used Mr. LJ’s excess TFSA room to hold a large portion of our emergency fund that was just yielding 5%. Since we didn’t have the investable cash to max out Mr. LJ’s TFSA, we used the room to tax-shield the interest generated on our emergency fund. This 5% cash yield pulled down Mr. LJ’s annual returns.
Overall
I’m very happy with how 2023 landed. We have a daughter now. Our finances are in good shape. What’s not to like?
Looking ahead to 2024, we should have more financial breathing room when I return to work. Mr. LJ will be off on paternity leave making employment insurance for 3 months. It’ll be a bit tight during that period, but if we survived a year of maternity leave EI, we should be alright in the upcoming year.