Archive for April, 2009

Barbaric Book Review: The Wealthy Barber

wb51x5dcrdnnl_sl160_The Wealthy Barber by David Chilton was first published in 1991.  It’s a basic financial guide, told in a narrative style, about three young people who seek financial advice from the town barber.  Yes, you read that correctly, a barber.

The story follows a young teacher as he learns, along with his sister and a friend, the basics of saving, investing, wills, insurance, real estate, retirement, mortgages, and income tax.  The lessons are given in one month increments, as the students visit the barber for haircuts.  The culmination of their learning is that each one has started on the path of financial independence.

Chapter 1: The Financial Illiterate

The author admits that he failed a basic financial planning test from a magazine, and intends to seek his father’s advice.

Chapter 2: A Surprising Referral

His father recommends that he visit Roy at the barbershop for better advice than he can provide.

Chapter 3: The Wealthy Barber

The three friends visit Roy, the Wealthy Barber.  They receive an introduction as to what awaits them.

Chapter 4: The Ten Percent Solution

Roy advises to pay yourself first, before you can spend it.  Invest 10% of your income for long-term growth, in an equity mutual fund.  The fund should be global, invested across many different industries.  Use dollar cost averaging to mitigate risk.  Don’t overlook the magic of compound interest.

Chapter 5: Will, Life Insurance, and Responsibility

The students are shown the problems of dying without a will, as the state will distribute your estate according to strict laws.  Roy recommends seeing a good lawyer for the details on wills, living wills, revocable living trusts, and naming an executor.  Wills should be kept up to date, and include a net worth statement to ensure that no assets are missed.

Roy insists on having adequate insurance coverage.  Maintain the proper amount of life insurance for loved ones.  Insurance is basically financial protection for your dependents, or income replacement insurance.  Carry enough to offset inflation, and don’t forget future lump sum obligations such as college tuition.  He recommends buying term insurance rather than whole life, and investing the difference in the premium cost.  Make sure the insurance is renewable and convertible, and opt for non-participating insurance.

Chapter 6: Planning for Retirement

Roy tells the students not to count on Social Security to be anything more than a safety net, but to ask for a Personal Earnings and Benefit Estimate Statement.  They should also consider rising medical costs, dependent parents, and inflation.

Pensions are becoming rarer, with inflation indexing rarer still.  He recommends IRAs, but is split in regards to investing in mutual funds versus CDs.  He recommends that whatever they choose, they should start investing now.

He cites the example of twins, at age 22, who take different investment paths: one twin invests $2,000 each year for 6 years and stops; the other doesn’t start until the 7th year, and invests $2,000/year for 37 years.  At age 65, both would have the same amount:$1.2 million.

Roy also explains Keogh, SEP, 401K and 403(b) plans.

Chapter 7: Home, Sweet Home

Roy enlightens his students with his insights on home ownership:

  • The reason most homeowners say that their house is the best investment they’ve ever made is because it’s usually the only investment they’ve ever made.
  • Paying rent is not always throwing your money away.
  • There are many tax-related benefits to owning a home, such as writing off property tax and mortgage interest, and the one-time capital gains exclusion.
  • The interest saved by shortening the length of your mortgage.

He also cautions about the housing bubble, an eerie prediction from 1991 that applies to the 21st century:

“Over the last several years, a few factors have combined to cause the prices of houses in many areas to skyrocket…higher disposable income is being spent on housing…the baby-boom generation…is fueling an increase in the demand for housing.   And…people are no longer averse to borrowing heavily…The consumer-debt rate is alarming.”

When he’s called a doom and gloom prophet, he responds:

“As long as they can service the debt, there is no problem.  But two things can happen that can lead to an inability to carry that debt.  One: rising interest rates…Everyone…is in debt up to their eyeballs…the mountain of debt will someday lead to higher interest rates…the second…Economic woes: layoffs, shutdowns, lower incomes…You remember how a recession works.”

Chapter 8: Saving Savvy

Roy gives some lessons on saving, such as:

  • A dollar saved is two dollars earned - while a two-dollar raise often nets just over a dollar in disposable income, a two-dollar savings nets you…two dollars.
  • Credit cards are antithetical to well-managed finances - credit cards are a destructive force that allow you to spend money too easily.
  • Save up before purchasing an item - you’ll get more satisfaction from a purchase by knowing the discipline and sacrifice that went into saving for it.

Chapter 9: Insights into Investment and Income Tax

Roy talks about the courage to buy when others are selling.  He again warns about the coming housing bubble:

“The halcyon days of guaranteed easy money in real estate are coming to an end.”

He also states that successful investors have an eye for value, and that you should do some research before making any investment decision.  Roy also restates the tax-deferred benefits of retirement plans, mortgage interest, and property tax.

Chapter 10: Graduation

Roy addresses the need for emergency funds, but recommends only a few thousand dollars as a cushion.  His reasoning is that most of your catastrophes are covered by insurance or a line of credit at your bank, reasoning obviously developed before the current credit squeeze.

College education can be funded by U.S. Savings Bonds, prepaid tuition plans, or an equity mutual fund for the long run.  He also identifies grandparents as a source of college tuition.

He reiterates the importance of health and disability insurance, as one in four people have a chance of being disabled for a one-year period.

The chapter ends with the three students receiving diplomas.

Rating: 4 out of 5 barber poles

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See links to more book reviews on the Barbarian Approved page.

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Low Budget

Circumstance has forced my hand,

To be a cut price person in a low budget land

- from Low Budget, by The Kinks, circa 1979

Low BudgetThey say the more things change, the more they stay the same.  I remember when that song came out; we were embroiled in controversy with a Middle Eastern country, faced with odd-and-even days of gasoline rationing and a stagnated economy.  People were embracing Hamburger Helper, and the government was exerting its influence in the private sector.

Times are hard but we’ll all survive,

I just got to learn to economize

I started my adult life in the mid-1980s, and with the freedom came responsibility.  I needed a way to track my expenses, and with my accounting background, I set up my first budget.  It was a primitive affair, in an old journal with lots of columns.  Eventually, I graduated to a computer-based spreadsheet.

Low budget sure keeps me on my toes,

I count every penny and I watch where it goes

I’ve used a weekly budget in an Excel spreadsheet since 1996, the year that I learned Excel.  Prior to that, it was in Lotus 1-2-3.  It’s just a simple tabulation, which lists my expenses by week.  I created it initially to avoid overdraft fees on my checking account.  Back when I started working, I had to watch my weekly cash flow.  Some things haven’t changed much.  I still watch it weekly, but just to stay on top of it.

Each year has it’s own tab, making it easy to compare expenses year-to-year.  To add a year, I just copy the current year’s worksheet.  I can do a pro-forma projection of next year’s expenses by factoring them off of this year’s actual expenses.

You can download a copy of the Excel file by clicking this link: Weekly Budget.xls

The file contains two tabs; a sample with some of the expenses filled in, and a blank tab for 2009.

I hope you find it helpful.  Here are some budget-related links:

Kevin at No Debt Plan talks about free cash flow and your debt,

PaidTwice asks what’s in your emergency fund?

2million is managing his big ticket item spending

Jaimie at Bargaineering wonders if you need an adult allowance.

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SuperSlow Weight Lifting

the gym
rick

Sitting at a computer for most of the day, I’m constantly fighting to keep my weight at a reasonable level.  At the beginning of February, I started my yearly ritual of shedding the holiday pounds.  I threw myself into the Metabolic Diet, and started lifting weights in the morning.  I was making a dent in my weight loss, dropping 20 pounds in two months.  I also increased my bench press and deadlift by 25 pounds, and I felt like I had made real progress.

Then, disaster struck: I hurt my wrist at the end of March.  I tried resting it, which showed no improvement.  So, I cranked it up, and started lifting again.  Another mistake.  I laid off the weights for a couple more weeks, but stuck to my diet.  Then, I reached back for something from my past: the SuperSlow Method.

Originally developed as a rehabilitation protocol, the SuperSlow principle seeks to take velocity out of the exercise.  Weights are lifted for a count of ten seconds, and lowered at the same count.  The goal is to keep the muscle under tension for 100 seconds.  This is accomplished in five repetitions, or reps.  The weight used is one half of your one rep maximum.

For example, if my one rep max for the bench press is 250 pounds, I’d load only 125 pounds onto the bar.  I’d unrack the barbell, and lower the weight for 10 seconds.  Once I’d reach the bottom of the lift, at the count of ten, I would push the bar up for another count of ten.  I’d repeat the sequence four more times, counting to 100 in the process.  The slow speed gives you excellent control over your form, and minimizes any potential for injury.

I can happily report that I’m back to lifting weights again.  Even though I’m using only half of the amount that I’d normally lift, I can tell that I’m making progress, all without taxing my wrist too much.  It still hurts occasionally, but not to the degree that I can’t lift weights.  I’d recommend trying SuperSlow, if not for rehab, then for a change of pace to your exercise regimen.

If you’re interested, check out these links:

SuperSlow website: SuperSlow Zone

Metabolic Diet website: MD+

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Barbaric Book Review: Die Broke by Stephen M. Pollan, Part 4

This is Part 4 of my review of Die Broke.  You can read the first three parts of this series by clicking on the following links:

Die Broke, Part 1 - Quit Today

Die Broke, Part 2 - Pay Cash

Die Broke, Part 3 - Don’t Retire

db71fkqpnxh6l_sl160_Step 4: Die Broke

Two Cornell University economists, Robert Avery and Michael Rendall, predicted that Baby Boomers would be the recipients of a $10 trillion transfer of wealth.  While this looks good on paper, the authors dispute this claim, citing a number of factors.  They believe that relying on this inheritance is bad for both your relationship with your parents, and for society in general.

Inheritance Obsession

Financial advisers have morphed into “inheritance counselors”.  This wouldn’t be so bad, but it leads you to count your chickens before they’re hatched.  Not only are you not guaranteed a large inheritance, but you’re not entitled to it, either.  The obsession with inheritance , a bad relic of the past, is bad for society.

Inheritance isn’t an entitlement

The Reagan tax cuts of the 1980’s allowed couples to pass on $1.2 million of their estates tax free.  By then, the contractual nature of inheritance shifted from taking care of a tangible asset, such as a farm, to intangible assets, like T Bills.

Pot of gold may be empty

By the time Baby Boomers realize any inheritance, it could be decimated by gifts made by their parents to charity or family. At the time of writing, about 25% of college tuition prepayments were made by grandparents.  Studies show that rather than decrease, spending patterns rise.  Rising health care costs may lead to a “million-dollar death”.

Patrimony is problematic

Inheritance is an inefficient way to pass on wealth, due to high estate taxes and family fights over the assets.  Parents struggle to maintain an estate, usually at the expense of living a full life.  Choosing a quality of death over a quality of life is soul killing - children must wait for someone to die in order to collect.  Studies show that receivers of inheritances have an erosion of their work ethic.  Inheritance is also bad for society, as the rich get richer.

Dying broke means living well

The old idea of inheritance was fine for a time when jobs were secure, real estate values climbed, credit cards were wonderful tools, and retirement was an idyllic reward.  Those days are gone.  Instead, assets should be treated as resources that:

  • Can help your family now
  • Allow you to enjoy your wealth with them while you’re alive
  • Shouldn’t outlive you
  • Should be prioritized to improve the way you live, not the way you die

A Program for Dying Broke

  1. Insure your streams of income - maintain term life insurance until you can cover potential losses through savings, and get a good disability insurance policy as early as you can
  2. Take your own pulse - maintain good major medical coverage, and look into long-term care insurance
  3. Take out some longevity insurance - annuities pay a predetermined income for the rest of your life, and although they may be irrevocable, you may be able to tap the principal at a reduced income
  4. Get paid to live in your house - reverse mortgages pay you as long as you live in the house, and the bank settles the loan at the time of your death
  5. Get a charity to pay you - charities offer products similar to annuities and reverse mortgages, and you get a tax deduction in the process.  You may also get to attend a testimonial dinner in your honor!
  6. Start giving it away - there’s no limit to non-cash gifts, and the IRS allows a tax free gift of $10 thousand each year per person.  If you apply it to your estate tax exclusion, you get the tax benefit, not your estate.  Payments to educational or medical organizations are also tax exempt.
  7. Take out a whole death policy - get a small whole life policy to pay for your funeral and clean up your debts.  This method is more efficient than prepaying for funerals.  Spend every last penny that you’ve got.

Dying broke means:

  • Abandoning impossible searches (secure, well-paying, fulfilling jobs)
  • Forsaking counterproductive financial practices (going into debt and failing to save)
  • Eliminating arbitrary deadlines (retirement at age 65)
  • Giving up dreams of immortality (building and passing along estates)
  • Dying broke is a more efficient use of your money.

My take on the Die Broke Plan:

  1. Done and done.  I believe strongly in having insurance.
  2. No surprise here, either.
  3. I’ve got to do some reading up on annuities.  I’ve got time though, as I’m still in my forties.
  4. Boy, this one’s going to be a hard sell, both to me and my family.  I’m not quite sold on reverse mortgages.  I’m still trying to poke holes in this one.  I’ll probably revisit this topic in a future post.
  5. This might work.  Again, I have to do more reading on the subject.  More fodder for a future post.
  6. I believe in doing this.  I can think of two cases in my own family that were on opposite ends of the spectrum, miserly and generous.  I intend to help my loved ones while I can see them enjoy it, rather than have them slug it out in probate court.
  7. My mom did this with a term policy, but the proceeds weren’t enough to cover all of the expenses.  Make sure the insurance is adequate.

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Barbaric Links: Debt Edition

I read a lot of good posts this week regarding debt.  Here are some of my favorite posts on this topic:

Kevin at No Debt Plan shares his frustrating lunch encounter;

Credit Card Watch prepares to save money with 0% APR credit cards;

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Miserly Bastard at Yet Another Blog About Money thinks higher education is overrated;

Mr. Tough Money Love sheds light on a foolish financial blunder;

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Barbaric Book Review: Die Broke by Stephen M. Pollan, Part 3

This is Part 3 of my review of Die Broke.  You can read parts 1 and 2 by clicking on the following links:

Die Broke, Part 1 - Quit Today

Die Broke, Part 2 - Pay Cash

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Step 3: Don’t Retire

Don’t retire?  I thought we should be planning for retirement from the time we start working.  In Die Broke, retirement as we know it is portrayed as a fairly new concept, which has worked properly for one generation only.

Social Engineering?

The authors argue that retirement is a form of social engineering that was a byproduct of the Industrial Revolution.  At the end of the 19th century, the demand for jobs shifted from rural to industrial, and older workers were encouraged to “make room” for their younger replacements.  Pensions were bestowed upon workers aged 60 or better in an effort to increase efficiency.  The New Deal created Social Security, where the benefits would be paid for by taxing the younger replacements.  This tax wasn’t as great a burden as it is today, as the average life span was 63, and the retirement age was 65. This led to:

Enabling

Parents of Baby Boomers benefited from a real estate boom, as their children drove up home prices in a scarce market.  Their living expenses were covered by pensions and Social Security, and their health care was covered by Medicare and Medigap policies.  Everything fell into place, as evidenced by:

The Impossible Dream (for Baby Boomers at least)

The parents of Baby Boomers had retirement income from the following sources:

  • Government assistance: 42%
  • Personal wealth: 20%
  • Pensions: 20%
  • Current wages: 15%
  • Other sources: 3%

What Boomers Can Expect

  • Government Assistance - Boomers will get a lot less money, and receive it later
  • Personal Wealth - Boomers will see a 34% income increase over their career, while their parents experience 524% growth
  • Pension Income - The shift from pensions to 401K plans, where less than half of those eligible participate
  • Wages - Boomers will have to work longer, and live on less
  • Other Sources - Inheritance?  Don’t count on it, as longevity increased health care costs may decimate any expected inheritance

A Fiction Built on Four Lies

  1. Age 65 is old - People are living longer, more healthy lives
  2. Leisure is more fulfilling than work - It’s nice to have a reason to get up each day
  3. Older people need to make room - With the workforce decreasing, the need for productive workers increases
  4. Younger worker = better worker - Older white-collar workers make fewer mistakes, have fewer absences, and an eye for efficiency

My Take

I’m years away from retirement, and I enjoy going to work.  This may change as I get older, but I find that I need somewhere to go each Monday.  Given the economic future that the authors have laid out for me, I may take a non-traditional retirement, and work part-time or even full-time.  The advice is to move the finish line from age 65 to death, which allows for a greater period of investment in equities.  The authors also advise us to keep an emergency fund, and have adequate health and disability insurance.

Part 4 of this review will cover the fourth and final step, called Die Broke.

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  • db71fkqpnxh6l_sl160_Barbaric Book Review: Die Broke by Stephen M. Pollan, Part 4 This is Part 4 of my review of Die Broke.  You can read the first three parts of this series by clicking on the following links: Die Broke, Part 1 - Quit Today Die Broke, Part 2 - Pay Cash Die Broke, Part 3 - Don't Retire Step 4: Die......
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Barbaric Book Review: Die Broke by Stephen M. Pollan, Part 2

This is Part 2 of my review of Die Broke.  You can read Part 1 by following this link: Barbaric Book Review: Die Broke by Stephen M. Pollan

db71fkqpnxh6l_sl160_Step 2: Pay Cash

The authors feel that there are three things that will keep you trapped: an unwillingness to change, and your ATM and credit cards.  These cards represent instant gratification, making it too easy to spend your money.  In order to achieve the goals laid out in the book, you should make spending difficult and uncomfortable.

The argument is that ATM and credit cards take the pain out of spending.  You don’t focus on the amount spent if you’re not counting out the cash.  Online banking and automatic payments distance you even more from bill paying, and you may be charged for the convenience.

The authors offer a few suggestions for Saving and Spending in the Twenty-First Century:

  1. Melt Your Plastic - Remove all credit cards from your wallet, and replace them with a charge card for emergencies.  Consolidate your debt on a low interest credit card, and put the card away.
  2. Bank with People - Remove the ATM card from your wallet also, and go to the bank once a week for cash.  Withdraw the cash by writing yourself a check.  Don’t spend any more than you’ve withdrawn.
  3. Practice Cognitive Spending - Keep track of where every dollar is spent on an index card, then categorize your expenses each week.  This will get you to think about how you spend your money.
  4. Buy Your Second Home First - The real estate boom was an anomaly traceable to the baby boom generation driving up the prices for a limited number of homes.  Don’t practice serial home ownership, but save for your dream home.
  5. Avoid “Everest” Buying - Don’t buy something “because it’s there.”  Buy things only when you need them, not when you want them.
  6. Ignore the New - Don’t buy the latest gadget, but wait forsomething that answers a true need.
  7. Repair Before You Replace - Retailers profit more on new things than repairing old things, so focus on repairing what you have.
  8. Pay Yourself First - Put away what you can in your 401K, and do it automatically.

My Take:

  1. For people that have no self-control, this is the best advice.  However, if you’re responsible, you can use credit cards to your advantage, such as rewards or zero-interest arbitrage, provided you pay off the balance each month.
  2. I’m disciplined enough that I don’t abuse my ATM card.  I stick to my weekly budget.  I rarely go to the bank.
  3. I track most large expenses, but our walking-around money doesn’t get analyzed.  As long as we stay under our weekly allowance I’m happy.
  4. Well, we’re living in our first home, and probably will for the near future.  We bought the home in part for the tax advantages, and have added on to it over time, paying cash for the improvements.  We’ve also paid off our mortgage.
  5. I use a cooling-off period to counteract impulse buys.  Can’t argue with that one.
  6. Or that one, either.
  7. I repair rather than replace if it makes sense.  I’m not upgrading an old computer if I can buy a new one for the same price as the repair.
  8. We do this.  The key is to automate it.  Pretend you didn’t get that raise, and put that away, too.

In Part 3 of my review of Die Broke, we’ll examine the third step, called Don’t Retire.

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Barbaric Book Review: Die Broke by Stephen M. Pollan, Part 1

db71fkqpnxh6l_sl160_In Die Broke, Stephen M. Pollan and Mark Levine propose “a radical, four-part financial plan to restore your confidence, increase your net worth, and afford you the lifestyle of your dreams.” Hey, sign me up!  The book, first published in 1997, attempts to poke holes in conventional financial and estate planning.  Though published over ten years ago, the material seems rather timely, namely the authors’ assumption that real estate values will be stagnant, and excessive borrowing will lead to financial ruin.  Let’s take a look at the four-part plan. We’ll start with the first step, called Quit Today.

Step One: Quit Today

The first step in the Die Broke philosophy is to realize that job security is dead.  The authors want us to give up hope of following the outdated Career Ethic that created the loyal, organization man of our parents’ time.  We shouldn’t be defined by our jobs, or seek self-fulfillment from our careers.  We should separate ourselves from our jobs, to pay more attention to our own bottom lines as we do to our company’s.  A job should be used to generate the money necessary for you to pursue your financial goals, and nothing more.  The authors call this the Mercantile Ethic, and lay out these principles:

  1. It’s Just a Job - Forget about a holistic work life, and concentrate on actually having a life.
  2. Jump Ship - Quit in your head, as the only way to increase job satisfaction and/or income is to get another job.  The more job hopping that you do, the more likely you’ll increase income.  Always look for a new job.
  3. Short Term is the Only Term - Long-term benefits like pensions are worthless if you’re fired before becoming fully vested.  Focus instead on short-term benefits that will improve your quality of life, such as health insurance, day care, parental leave, telecommuting, flex-time, and even health club memberships.
  4. Lateral is Better than Vertical - It’s better to take a lateral move that expands your skills than it is to take a position with greater responsibility.  There’s probably no increase in pay, just the chance to be a scapegoat.  Added skills make it easier to jump ship.
  5. Will This Be on the Test? - Learn exactly what’s expected of you and do it the best you can.  Do your job well, then go home.
  6. Just Do It -  Pay no attention to company politics.  Who gets credit doesn’t matter.
  7. There Are No Dues - There’s no point in paying your dues, as jobs must make economic sense from day one.
  8. Show Me the Money - The only reward that matters is what you are paid.  Everything other than money can come from the rest of your life.  Your job is the only part of your life that will bring you money, so you need to maximize that.

My Take:

  1. Wow, and here I was following Maslow’s Hierarchy of Needs all these years.  I’ve always looked for something else besides money from my job, whether it’s friendship, company softball games, golf outings, respect, etc.
  2. I tend to only look for a new job when I feel that I’ve stopped learning.  I treat my job as a kind of paid schooling. Why leave if class isn’t over yet?
  3. I don’t know about you, but if I have to put in an extra year to become vested in a pension, I’m doing my best to try to stick around.
  4. I agree with this one,  why take a promotion on a promise of greater income, when the company would have to hire someone from outside at the going rate.
  5. You should always know what your job responsibilities are, and they should be defined by your boss.
  6. It’s hard to ignore company politics if they affect you directly.
  7. I think you have to pay some dues when you join a new company.  It’s just part of learning the job, and earning people’s respect.
  8. I guess the bottom line is the bottom line, though I do get more out of my job than just a paycheck.

We’ll take a look at Step 2, Pay Cash, in Part 2 of the Die Broke review.

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Barbaric Update: Switched My Theme to Fusion

I switched the theme to my blog to Fusion.  I think it makes it easier to read.  What do you think?

Follow me on Twitter: http://twitter.com/CorpBarbarian

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Barbaric Links - The Yankees Win Edition

First game at new Yankee Stadium Vs. Chicago Cubs April 3, 2009
Bari D

Ah, the Yankees’ first win at the new stadium, and this barbarian is very happy!  Looks like the ghosts found their way across 161st street after all.  I hope they can put together two in a row.  Here are some worthwhile personal finance links to check out from the past week:

Have a great weekend!

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