Updated on 01.22.12

Reader Mailbag: Sleeping Toddler

Trent Hamm

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Investing advice
2. Good advice for college student
3. International mortgage question
4. Favors as gifts
5. Allowance strategies
6. Life insurance for children
7. Buying local
8. Retirement savings challenges
9. State retirement plans
10. Podcasts

I’m typing this while holding a sleeping one year old on my shoulder. He’s been up most of the night with some sort of intestinal illness and has only slept in fits and starts.

Sleep deprivation and worry are fundamental parts of being a parent.

Q1: Investing advice
My husband and I have a 14 month old son. We have 15k that we would like to put towards his college education but unfortuantely we just aren’t sure how to go about investing the money.

My husband and I are great savers, but really know little about investment even when it comes to our own money. We have some money in a mutual fund and the rest in a money market. Do you have a good book that you suggest reading for financial advise, really just a good overview of the options for investment?
– Shanda

If I were you, I would look at the 529 plans offered by various states – you don’t necessarily have to be the resident of a state to use their 529 plan, though they do offer some additional state income tax benefits if you’re a resident of that state. For example, the plan in Iowa is run by Vanguard and I’ve been incredibly happy with it.

If you invest money in a 529, then take all of it out for educational purposes, you don’t have to pay taxes on any of the money – even the money you earned on the investments. It’s all tax-free if you use it for education.

Beyond that, one book I would definitely read if I were in your shoes is Debt-Free U by Zac Bissonnette. It’s a great look at how to save for college and some clever ways to reduce costs there.

Q2: Good advice for college student
My daughter is 20 years old and a sophomore in college. I pay all of her college expenses (tuition, books and living expenses). She has a part time job and is paying for her incidental expenses (gas, coffee, iTunes, moves, etc.) I have taught her a great deal about personal finance and have been a good example by living well, saving money and keeping out of debt. I talk quite a bit with her about finances and using money smartly. However, I am wondering if you could recommend a good baseline book for her to read about overall finance strategy.

– Margie

The book Please Send Money by Dara Duguay is pretty much the perfect book for the situation you describe. It addresses the college stage of financial maturity, as students grow toward financial and personal independence.

Even with that book in her hands, she’s not going to magically begin understanding her financial situation unless she wants to, and that’s a decision that’s internal to her. You can’t make someone care about their finances.

The best thing you can do is what you’re doing – making the information available. It’s up to her to take the next step.

Q3: International mortgage question
I’m currently planning to invest in a house in a different country. I won’t be able to take any loan in that country as I don’t work there. I want to know if there is any way I can take a house loan here to buy a house in a foreign country. By the way, I’m not a US citizen.

– Ama

It is very rare for a bank to take out a loan using a house in another nation as collateral. The only banks that might consider doing it are large multinationals that operate both in the United States and in the nation you’re hoping to buy the house in.

If the bank does not do business in the nation that you’re buying the house in, the risk the bank takes on in offering the mortgage is incredibly high – likely far outside the realm that any bank would take on.

If you’re going to look further into this, start with the huge banks like J.P. Morgan Chase or Bank of America that might be operating in that nation or have close relationships with banks in that nation.

Q4: Favors as gifts
For our baby shower, our friends and family all gave us certificates for a night of babysitting. We have a pile of about twenty of them from various people. The problem is that now I feel sort of guilty using them. We’ve just left them in an envelope.

Should I feel guilty about using them? Should I expect that people would feel guilty if I gave similar things as gifts?
– Annie

You shouldn’t feel guilty at all about using these certificates. They were a gift to you, likely from people who understand how important an occasional night out without children is to new parents, and they likely want to fulfill that certificate.

If someone gives you a gift, there’s an intent that you will use that gift. If they didn’t want you to have that night of free babysitting, they would have given you bags of diapers for your baby shower or something similar.

Use the certificates and enjoy some date nights with your husband.

Q5: Allowance strategies
We are talking about starting allowances with our two children, ages 9 and 5. I would just like to read your ideas and strategies, then compare them to ours. We would just like a second opinion, if it’s not too much trouble. Thanks so much!

– Mel

We start allowances at age four and plan to discontinue them at age sixteen. The allowances are not tied to any particular household task, but the amount given isn’t very large. The amount given is equal to fifty cents times the age of the child.

We use a Money Savvy Pig for our allowances. The children are required to put one quarter in each of the slots and then are free to put the rest of the quarters wherever they see fit.

The entire point of an allowance for us is to get our children talking about money and also to provide a method by which they can make spending decisions themselves instead of just directly asking Mom and Dad for everything.

Q6: Life insurance for children
What is your take on life insurance for kids? I would assume that someone taking life insurance on their children isn’t in it for the financial long haul.

– Charlie

The only reason I can see for having a life insurance policy for your child is if you’re unsure if you could afford the costs of a child funeral upon their death or if you’re purchasing some sort of whole life policy for your child that extends into adulthood.

I’m not particularly a fan of such whole life policies. They tend to really only pay off if you find that your child has some condition not obvious when they’re young that causes them to become uninsurable later in life, which is a reasonably rare occurrence.

Currently, we have very small whole life policies for our children for this exact reason. The amount is very small – just enough to cover funeral costs. Most of the money we’re investing in our children is going into college savings.

Q7: Buying local
I really love the main street in my town, but most of the shops sell things for much higher prices than I could pay online. How can I justify paying $50 for a pair of shoes when I can get them for $25 online?

– Emily

The reason is so you can have the opportunity to stroll down the main street of your town and not see boarded-up windows and shabby businesses that are barely surviving.

A thriving main street in a town is an indication that the citizens of the town value having such a main street and are willing to pay somewhat higher prices there than they could find online. That is a town I would want to live in. It’s one of the things I admire about towns that have thriving main streets and town squares.

The cost of keeping a physical location open in an average town simply drives up the prices in that store because online retailers don’t have to worry about a traditional storefront. They just have to keep the servers up and they can ship out items from a tightly-packed warehouse.

If you value having that main street, be a patron of the stores there. If you would rather save $25 on your shoes, order them online and accept that the main street you profess to value is likely soon to be a thing of the past unless everyone else in the community steps up to support something that you supposedly value but don’t actually bother investing in. You can’t have it both ways.

Q8: Retirement savings challenges
I am 27 years old and have been working for two and a half years. My current income is $52,000 (pre-tax), take-home pay is about $3000 per month. I only have student loan debt from medical school: $47,587 at 4.25% and $135,179 at 6.625%. My parents generously paid for my undergraduate education, and although they don’t expect repayment, my hope is to assist with my brother’s college tuition. My fixed expenses each month are rent ($750) and student loan repayment ($500); I also spend about $300 per month on groceries, gas, utilities and laundry. The remainder goes into savings. I currently have $6500 in an emergency fund, $10,000 in a traditional IRA and $27,000 in a catch-all savings account at 0.9%. I signed up for my work’s 401(k) this year and will start contributing 15%, but do not get matching from my employer. I plan to get married (budget $15,000, split between me and my fiance) and buy a house in the next five years. I have guaranteed employment for the next three and a half years, but will be making less than $65,000 a year. I am hopeful that once I am done with my training in four years, I will be making $150,000+. I still feel like I am not saving enough. How much should I be saving? What should I do with the money in my savings account that is earmarked for retirement (about $10,000)?

– Ron

I think you’re saving well given your current financial reality.

You need to ignore what you think you might be making in the future and focus on what you’re making now. Relying on your future self for income or anything else is almost always a mistake because when we visualize the future, we tend to rarely visualize what will actually happen. Instead, we usually visualize something better than what will actually happen.

Making financial moves now that relies on you earning a truckload of money later on puts a greater burden on your future self. It adds stress and pressure to your future that doesn’t need to be there.

Q9: State retirement plans
I was wondering what you thought about the following retirement plans that are available to me as a fairly new State of Connecticut employee. I started working for the state in August of 2011, and I need to choose a plan by February 28 of this year.

As a bit of background, I am 37 and married with two children. My husband is self-employed, and contributes 10% of his income to a retirement savings account. I have a very small retirement account with Fidelity, left over from my last job (around $20,000), which I haven’t rolled over or cashed out yet. My plan was to just keep it in Fidelity if I choose one of the SERS plans below, or roll it over into ING, which is the State’s ARP funds management company.

I plan on working for the State of Connecticut for the rest of my career, so I’m leaning toward option 1 or 2 (but which one?), and contributing an additional 10% of my income to my own IRA each year. In the old days, I know you were supposed to take a pension if you had the chance, but with budgets and politics as they are these days, I’m not so sure. After seeing my Fidelity account shrink with the market, though, I’m not sure if the Alternate Retirement Program would be any better.

Here are the three plans from which I must choose:

1. State Employees Retirement System (SERS), Tier III – This is a defined benefit plan qualified under section 401(a) of the Internal Revenue Code. The employee contribution to this plan is 2% of your salary and contributions are made on a pre-tax basis. Should you meet the requirements for receipt of a retirement benefit under this plan, the benefit you receive will be calculated based on a formula which uses the number of years you participated in the plan and the average of your five highest years’ salary. Under the Tier III plan, retirement credit may be granted for some prior employment service, including military service and municipal employment. Restrictions apply. See the SERS Tier III Summary Plan Description for more details.

2. State Employees Retirement System (SERS), Hybrid Plan – This is a defined benefit plan with a “cash out” option qualified under section 401(a) of the Internal Revenue Code. The employee contribution to this plan is 5% of your salary and contributions are made on a pre-tax basis. At the time of retirement you will have the option of receiving a retirement benefit calculated based on a formula which uses the number of years you participated in the plan and the average of your five highest years’ salary or in lieu of such benefit a one-time lump sum payment with a five percent employer match and four percent interest. Under the Hybrid Plan, retirement credit may be granted for some prior employment service, including military service and municipal employment. Restrictions apply. See the SERS Hybrid Plan Summary Plan Description for more details.

3. Alternate Retirement Program (ARP) – This is a defined contribution plan qualified under section 401(a) of the Internal Revenue Code. An ARP member’s benefit is based upon their contributions to the plan and investment earnings. The employee contribution to the plan is 5% of your salary and is made on a pre-tax basis; the State of Connecticut contributes an amount equal to 8% of your salary. Plan contributions are invested at the direction of the member in investment funds available under the plan. ING is the State’s administrator for ARP. Information on ARP is available at www.CTdcp.com.
– Jan

I tend to be very hesitant to trust pension plans that are run by the government – actually, I don’t trust pension plans of any type. Governments and businesses will often start pillaging their pension plans if they need cash to stay afloat, no matter the promises they’ve made.

If I were you, I’d choose the plan that allowed you the most independence possible from the state, which sounds very much like the third option. I did some reading on the plan and it sounds as though your money is held in an independent account managed by ING.

If I were you, I’d also start up my own Roth IRA, which enables you to save money for your retirement completely independently of your job.

Q10: Podcasts
What’s your current list of podcasts you listen to? I know you change your rotation regularly (as do I) and I’m always looking for new ones to listen to.

– Evan

I listen mostly to NPR programs – Marketplace, Fresh Air (I pick and choose episodes), This American Life, Wait, Wait – Don’t Tell Me, and Radiolab.

Aside from that, I listen to The BS Report with Bill Simmons (which mostly covers sports and pop culture) and The Dice Tower (which covers board games).

That, along with some music, is what I listen to in a given week.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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  1. Andrew says:

    Trent, I seriously love your answer to Q. 7.

  2. NMPatricia says:

    Great answer to Q7. I agree Andrew!

  3. Esme says:

    Thirded. Excellent answer and the truth. It’s one of the reasons I rarely shop online and never at Sprawl-mart.

  4. Kevin says:

    Governments and businesses will often start pillaging their pension plans if they need cash

    You know they can’t just do that willy-nilly, right? Besides immense union pressure, there are rules governing minimum funding formulas that have to be met by the plan sponsors. The difference is, with a business, any shortfalls have to come from profits (assuming there are any), whereas with government, they can just raise taxes.

  5. Johanna says:

    Q8: How can you not rely on your future self for income? Do you expect everyone to have enough money in savings right now to last them the rest of their lives?

    The only reason it makes sense to shell out $180k+ for a medical degree (whether you’re taking out loans or paying cash) is the hope that you’ll be making a truckload of money at some point.

    Anyway, Ron: There’s no one-size-fits-all answer to how much you “should” be saving, but you might want to take a look at the 50/30/20 budget in “All Your Worth.” That’s 50% of your after-tax income for fixed expenses (including the minimum payments on your debts), 30% for flexible expenses (mostly fun stuff), and 20% for savings and extra payments on your debts.

    As for what to do with the money in your IRA: You’re pretty young, so it makes sense to invest pretty aggressively. Look into diversified stock mutual funds or target retirement mutual funds.

    Some final advice: If and when the truckload-of-money job does materialize, try to spend at least the first year or two living as if you’re still making $50-60k. Then you’ll be in great financial shape.

  6. Johanna says:

    Q5: Trent, when your children are 14-15, are you still going to be giving them their allowances in quarters?

  7. Jill says:

    Q3- the only way I can think of it working is if you’ve got enough current equity in a home you own in the US that you can pull that through a HELOC and be a cash buyer in terms of the international purchase.

    Q9- the large government pension plans take a long time to make substantial changes to, and generally let you switch to a defined contribution plan long before they hit you with some sort of downgrade to the defined benefit side. Also, time is not on your side for the defined contribution route compared to those who got into the system in their mid-20s, and even the more optimistic rate of return rates for defined contribution tend to be below what you’d get out of defined benefit. I’m in the Florida Retirement System, and the only real advantage defined contribution has is that it’s about a year to vest instead of 6-8 years to vest for the defined benefit plan. So if you’re a long-timer, it makes sense to stick with defined bennie.

  8. Steve says:

    @Q1 To answer your question with an actionable formula:
    If your state has an income tax, check to see if your state’s 529 is exempt from that income tax, and also if there is a direct-sold (NOT adviser-sold) plan. If so, use it. If not, use the Utah 529 plan, which is run by Vanguard and has the lowest expenses of any 529 in the country (and is open to investors from other states).

    As far as how to invest the money: The 529 you choose has an investment choice labeled with the year your child will start college/turn 18. Put all the money into that choice.

  9. Steve says:

    @Johanna Re:@Q8
    I think the point Trent is trying to make is that too many people get into trouble because they assume a huge salary is just around the corner, and spend today as if they have that salary now, or as if that salary is guaranteed. Of course we wouldn’t have any doctors if all medical students ignore their future income altogether per Trent’s advice. Nevertheless, even as a medical student, it’s wise to keep your expenses low until you actually start making that income, and try to save a little money whenever you can.

  10. Johanna says:

    I’m going to go against the crowd a little bit on Q7. There are lots of reasons it’s worth it to me to patronize my local main-street businesses. They often offer things I can’t get online, from big-box stores, or from other chain retailers: convenience, higher quality, a more pleasant shopping/dining environment, expert service, etc.

    The main-street businesses I *don’t* patronize are the ones that don’t offer any of those things, but just try to guilt-trip me by screaming “We’re a small local business! Why do you hate small local businesses!?!?!?!” They’re the ones, usually, that end up as boarded-up windows. To which I say: Good riddance.

  11. Johanna says:

    @Steve #9: I don’t doubt that that was the point Trent was trying to make. I think Trent often tries to make good points, but gets carried away with himself and ends up turning a good point into something ridiculous. This is one of those times.

  12. Tom says:

    Q9: I’d be weary of option 1 for two reasons:
    1. It’s only 2% of your salary as a contribution, and you’ll reach retirement age (as defined by social security) in 20 years. That may or may not amount to a large benefit, depending on how fast your salary rises.
    2. It’s the default choice for people who don’t make one according to their website. This leads me to believe it’s the cheapest option for the state, which may not necessarily be the best option for you.
    I’d strongly consider option 2, you’ll save a larger percent of your salary pre-tax, have a pension or cash out option. You can always continue to save elsewhere, like IRAs or taxable accounts if you really want to invest in the stock market (which is what option 3 sounds like to me).

  13. Jackowick says:

    Q7 “Mainstreet” I enjoy these benefits from mainstreet:
    -Trying on actual clothes and seeing if my intended purchase has a loose seam or other quality issue, in addition to “fit”
    -Seeing the item in person for size/shape/color. Ordering a toaster online and trying to measure out the approximate countertop footprint (and interior) isn’t the same as holding it in your hands
    -In the case of returns, there’s no issues and it’s much cheaper for me to hit the store vs driving out to UPS or USPS. Even a prepaid label may require me to “pay” by using my own tape to reseal the box.
    -Goodwill discounts: my local comic book shop was gifted by a collection of books from an old customer. The purpose was to reward the loyal customers with free comics. I had recently committed to having an in-house subscription with the shop and viola! I got to enjoy free books at Christmas. Similarly, I’ve had a cash-and-carry discount at a local parts store where I am also buying local.
    -Taxes and property: my town has a lot more churn on mainstreet over the past 3 years. Every time I store goes down, it’s a sword of Damocles on the taxes next year. My home value is also tied into the community and the sellability of the neighborhood/town.

    While paying more for local goods seems to be counter intuitive to being as thrifty as possible, it also ties into responsible buying. I see many local businesses where the owner of the shop also owns the house over top/in the back. If they had to close up and move to walmart, their hourly wages would not cover their expenses and they would have to MOVE out of the community they enjoy.

    The best thing you can do for a local business is to make a purchase AND tell a friend. Word of mouth is huge. I worked at a mom-and-pop store in high school and we lived and died by word of mouth. When a customer came in and was able to get free advice, my boss got upset that they wouldn’t give us a symbolic purchase to compensate us, buying even a dollar item to show they were grateful. Nothing is free, and gratitude should always be paid in full.

  14. Wes says:

    I agree with Johanna with regards to main-street businesses. My wife and I will bring our business to such places only if there is a good reason to, aside from “We’re local.”

    Thus, we prefer local restaurants over chains and occassionally go to small markets to get specialty food products that you can’t get at the big-name grocery stores. But one type of store I have yet to see any justification for visiting is the local bookstore. Amazon is cheaper (I know, I know, there’s no sales tax. But even if I did pay sales tax at amazon, it would still be cheaper than full retail). With the free prime account we have, it is way more convenient. Also, I have no need to browse because I know what I want, and I know Amazon will have it.

  15. Jules says:

    RE Q7: I also second Johanna–sentimentality is never a good reason to sell yourself short. If you have a quality product that I want, I will happily pay through the nose for it. Naked Chocolate in Philly, for instance, had $3.50 hot chocolate, but it was worth every cent, and Capogiro’s gelato cost an arm and a leg too, but that didn’t stop me from getting one every few weeks. Why? Because they were GOOD. But don’t give me lukewarm tea with milk and call it “chai” and expect me to come back.

  16. jim says:

    Q2 : Personal Finance for Dummies is a good starter overview book. (not implying anyone is a Dummy)

    Q4 : No reason to feel guilty at all. They gave you babysitting as a gift. They expect and want you to use it.

    Q6 : Your children do not need life insurance. Generally its a poor investment. IF you can’t afford a funeral then you should first build an emergency fund large enough to cover such a cost. If you are simply broke and worried your child will die (very low risk) then cheaper route is a rider on your own life insurance.

    Q7 : I can see paying more for stuff to support local shops. But paying 100% more? Thats too much if you ask me. If you’ve got money to blow and want to support local businesses that need your charity to stay open then OK I suppose you’re free to do what you want with your money. But I don’t think its reasonable to spend that much more just because someone has a shop nearer you. A small business needs to be competitive and have some sort of reasonable business model to survive rather than just relying on charging very high prices and hoping people will pay more.

    Q9 : Trent has an unfounded paranoia about pensions. Theres no real reason to think any state pension is going to short change its existing members. You can’t just steal money out of pensions. I don’t think a state pension fund has EVER defaulted. Private company pensions are heavily regulated and there is a government guarantee organization that would step in to bail out a pension if a company goes bankrupt. I don’t know why Trent is so anti-pension but I assume something in his families past makes him bias.

  17. mary w says:

    Q9. Rather than ask Trent and get a knee jerk answer, I’d spend the money and have a CPA or financial advisor “run the numbers” on the 3 plans so you can better understand what you will get in each.

  18. jim says:

    Q9 : To know which option to choose you’d have to look at the actual benefit formula for the pension. But the question doesn’t give that information. Just knowing how much % is contributed by the employee isn’t enough.

    Looks like SERS III in CT is 1.33% x average latest 5 years salary x years service (roughly). SERS III and the hybrid plan seem to have the same retirement benefit formula. I’m not really sure why somone would want to go with the hybrid plan since your contribution is 5% and all you get is the right to take a lump sum. The SERS III plan is only 2% and has a pretty good benefit. If you had that SERS III plan for say 30 years you’d end up with a pension of roughly 40% of your final pay. The pension also has a cost of living adjustment. Do do as well with your own investments in the ARP plan and the 8% from the state you’d have to get somewhere around 7-8% return on your investments. Thats a feasible return. Either one is not a bad choice financially so it depends if you want a pension or the contribution investment account.

  19. Petra says:

    Q8 I think ou’re ignoring your student loans too much. Unless you are betting on student loan forgiveness (and that’s a very risky bet with the odds against you), you are ignoring an opportunity to make more than 6% guaranteed profit with your money by paying off those student debts quicker. So stop puTting money away in the 1% savings account and start putting it towards your debts.

  20. Sara says:

    State pension plan choices: I don’t think Trent is well qualified to answer this one. I am a retired teacher receiving a state pension which is a defined benefit. I receive a monthly amount based on a formula containing my final salary, my years of service and my age at retirement. With 27 years in the system, it’s quite generous. In contrast some other friends were in plans where they put their own money aside, and with the stock market slide, their savings are worth less (they refer to this as ‘201’ plans). Many institutions are phasing out the defined benefit plans, but if you have the opportunity to get into one, it can be a great option.

  21. deRuiter says:

    Q4, Annie, I’d be pretty careful about whose chit I called in when leaving my precious baby wth someone else. Can picture your family pedophile (and they are there!) handing in his / her chit with all the rest, a big grin on his / her face. Do you actually KNOW all these people well enough to leavy your defenseless baby with them? That said, you want web cams set up if you are leaving your child with anyone. This is not personal finance, this is the safety and health of you BABY. Maybe you ought to postpone a lot of these night alone with husband events until the child is older. That said, everyone ought to be real careful about with whom they leave children, there ARE pedophiles in some family circles, and often the family won’t tell you, they have a stake in keeping it secret. For instance, Daddy or Mommy molester is protected because he / she brings home the money from a good job. This is your BABY.

  22. Kevin says:


    That’s reckless fear-mongering. You ought to be ashamed of yourself.

  23. deRuiter says:

    #22 Kevin, Ashamed of warning people about potential pedophiles? What Kevin, you don’t believe that there is pedophilia in some families? How about the Catholic church, one big happy family with many pedophiles over the years who were enabled by their bishops, moved from parish to parish, to give them a fresh start and new children to molest? Remember all those caring parents who left their boy children in the hands of priests so the children would be “safe”? Better to be wary than have YOUR child molested and emotionally damaged for life. You can carry this “nicey, nicey, we’re all loving people” stop “fear-mongering” stuff too far. Ask your local police or social workers about how much child sexual abuse there is in families. How about those people who left their children with Sandusky? Bet they wished they’d kept the little boys at home. It’s up to the parents to PROTECT THEIR CHILDREN, not worry about hurting the feelings of well meaning characters like Kevin who do not understand or accept that there is evil in this world. What should we do Kevin? Should we put our babies with any family member who volunteers in order to be politically correct and not hurt the feelings of the occasional pedophile?

  24. Courtney20 says:

    Yep, don’t leave your child with anyone ever. Including your spouse. They might be pedophiles. Heck, you yourself might be a pedophile. Better to put them in a cage and have them tended to by robots.

  25. jim says:

    Courtney, what about pedophile robots?

  26. Courtney20 says:

    Jim – I don’t know, better check with Old Glory Insurance to see if you’re covered.

  27. jim says:

    Old Glory Insurance company is registered in Texas. They are not licensed in my state though. Their website says “Old Glory Insurance Company provides workers’ compensation insurance and services for small to mid-size businesses.” So they seem focused on commercial workplace comp. I don’t know if they still offer individual consumer robot plans. I should call and ask…

  28. Baley says:

    @deRuiter: Of course all parents should be careful of whom they leave their children with; you shouldn’t assume that Annie is not very familiar with all the people who offered to babysit her baby.

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