Time — Your Most Powerful Savings Weapon

The most powerful factor to assist in the planning for your future is time. However, time is also the one factor of investing that you can’t control. What do you do? 

To properly unleash the power of time in the calculation of compounding interest, you must start early to invest. You have more control over your future than you know. For example, if you saved only $100 each month from the time you graduate college at age 22 until you reach 30 and invest it prudently, say at an annual return of 6%, you would accumulate $12,344.27. Not quite ready to retire at age 30, right?

What happens when you continue saving each month but the amount is increased to $250 from age 30 until age 67, which is the age full retirement age for Social Security Benefits and assume the same annual rate of return? Of course, the amount in your savings account would be much higher if all assumptions were realized. How much would you realize in your savings account at age 67? You would have accumulated $522,896.95! Now, can you retire and live the life you choose? It depends. 

The key financial principles to learn from this illustration is that time and compounding of interest have helped you grow your account by $402,296.95 and you only invested $120,600. What if you had invested a little more each month, say $500 per month from the age of 30? You would realize a total of $932,763.11! To illustrate the power of these two financial principles, you have saved only $231,600 from your earnings and the account grew $701,163.11. 

What if we looked at this from another angle? Let’s assume that you enjoy coffee. Instead of the latte with extra espresso that costs $3.50 per day, you save this amount in your savings account each week for a total of and invest the funds to earn 6% annually. How much would you have accumulated in 45 years? $294,561.07! Now, that is a lot of coffee money.

The overall lesson to learn from these illustrative calculations is that you can save a significant amount of money for retirement if you start early in life. Time is the most powerful of element when growing money for the future. Of course, no one earns an exact 6% each year for forty-five consecutive years. However, the calculations provide you some motivation to start saving at the earliest point in your life. 

One of the best methods of accumulating money is to fund your employer retirement plan with as much as you can defer from your salary. Most plans feature a matching contribution from the employer, when coupled with your potential for growth, would help you reach your savings goals faster.

These simple concepts can work for you if you maintain discipline in the process. Too many people believe they have plenty of time to save for retirement and create a lifestyle that is too costly to allow them to save. Here is the trick to this process: do what wealthy people do. Save first and spend the rest! See you on the golf course.

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Financial Literacy: The Key to Successful Kids

One of the wisest statements made about planning for the future can be found in an ancient Chinese proverb: “The best time to plant a tree is 20 years ago. The second-best time is now.” This is a philosophy that is applicable to your finances. 

Our schools are bombarded with challenges in teaching students the important lessons to equip them for life – algebra, science, English, literature, etc. I firmly believe this list of important lesson should include financial literacy. Starting to understand and apply financial concepts at an early age will empower the children to initiate better habits that will ultimately give our communities and country a better financial future.

Financial literacy is a term we use for the subject of financial planning concepts and the act of securing one’s future in a comfortable and confident manner. By initiating such subjects as savings, investing, budgeting, taxes, credit, and other vital areas of life at ages as early as 10, you are setting your child up for success in their future. Too often children are in college or after before they realize what they don’t know. This is on us! As parents, not only should we be responsible for the physical, cognitive and emotional well being of our children but we should include their financial understanding as well. 

An area to start a child’s understanding of financial matters is teaching them the value of planning for tomorrow. If a child desires a certain toy or game, ask them how they would pay for the game. Does your child have responsibilities around the house that teaches them that all family members must share in the household duties? If so, perhaps you could negotiate an allowance or “hourly rate” for completing their chores. However, to continue the lesson of financial responsibility, you will save one-half or more of their earnings each week in a savings account. I have often learned with my own children that items purchased with their earnings are cared for much better than those items given them.

Teaching children about the use of banks and proper credit are good starting positions for them understanding these institutions. When I was a very young boy, my parents took me to meet their banker. I was in awe at the marble floors, high ceilings and when he showed me the vault – WOW! I knew at that moment that I wanted to be involved in the finance in some form. But the words of John Gillson, my parent’s banker, still ring clearly in my mind to this day – “Take care of your credit and it will take care of you.” What Mr. Gillson actually meant was that one should only use credit when absolutely necessary and, in the manner, needed to bridge the short-term cash flow needs of the person.

It is critical that our children understand the importance of finance in their lives. The best future you could help them achieve begins with a basic understanding of the impact finance has on their lives and how to appropriately utilize financial concepts to help them live life to its fullest. For additional resources about teaching children about financial concepts, view our Compass Capital Management Videos. Until next time, I’ll see you on the golf course!

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Why Saving For The Future Matters?

Forty-one percent of Americans believe they would be able to cover a $1,000 emergency with savings, according to a survey conducted by BankRate in January, 2020. The chickens certainly came home to roost with the COVID-19 pandemic! The more disturbing findings of the survey were that 37% of the respondents would use their credit card to resolve the emergency. The lack of savings in the United States has reached critical stages for most families. To prepare your family for inevitable times of critical cash flow emergencies, I am providing you a proven strategy that will provide you with the confidence to weather emergencies in the future.

Some of the most common “emergencies” to strike families are automobile mechanical damages, large appliance failures, emergency medical care and loss of employment. Just one of these instances could spell disaster for your family without adequate savings to mitigate the disruption. During the pandemic, too many people have felt the anxious feeling of unemployment and wondering how their family will survive. Luckily, for many, the state and federal unemployment programs have been far richer in benefits than otherwise could have been. With the temporary additional federal unemployment benefit of $600, some individuals have “earned” more cash flow while being unemployed than experienced from their actual job. 

First, review your expenditures currently experienced by your family and choose one item of lesser importance to you from the list. This is the item that will no longer be purchased and the funds previously spent for this item will be automatically drafted each month from your checking account to your savings account. What this process does is take away the resistance of human nature to change by asking your financial institution to do the hard work for you. How this is accomplished is by visiting (or calling) your bank and asking them to perform an ACH (automated clearing house) transaction for you in a specific amount on the same date each month. Once you have adjusted your mindset to the alleviation of this item, choose the next least desired item on your list and continue this process until your family’s budget reflects only those expenditures that truly provide your family enjoyment. The ultimate goal of the process of saving for your future is to maintain 90 to 120 days of living expenses in a liquid account in case (and they always do) an emergency strikes your family. 

Second, if you are capable, consider seeking a part-time job or side gig. During the summer months you may have an opportunity to work in the evenings or weekends performing odd jobs or lawn work to increase your cash savings. This seasonal employment activity is an excellent method of increasing your cash reserves but may also tempt you to increase your lifestyle. This is where discipline must be exerted. Let’s say you earned an additional $200 in a week on your evening job. If you deposit these funds in your bank account, ask your bank to transfer them to your savings account instead of leaving them in your checking account. By performing this transfer your account will appear as though you have the same amount as always but your savings account will be increasing for your family’s safety. Any incremental increase in income, such as a bonus from your employer, should be treated in a similar manner.

Lastly, you may have accumulated assets which you no longer use such as additional lawn equipment, stored furniture, etc. Why not sell these items and place the proceeds in your family’s emergency fund? You may be surprised what someone will pay for a used piece of equipment!

The key to providing confidence and security for your family is the consistent monitoring of expenditures coupled with a mindset toward saving. Your bank most likely has an app for your phone that you can access with a couple of clicks. The challenge is to forgo looking at the increasing savings account everyday thinking it is available to you for a family vacation or new TV. No, this money is for the next emergency to strike your family. You will be glad you were disciplined and can face the next catastrophe with greater security.

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Strategies for Using Your Stimulus Check

Have we secretly transported to another universe? We can’t sit in a restaurant and eat dinner. We can’t attend a movie theatre. We can’t even visit our friends. All of these changes in life because of one thing – a virus. Have we experienced a paradigm shift in our lifestyle in the United States? I say NO WAY!

The United States Treasury has begun the process of issuing stimulus payments to qualified American citizens. Checks and direct deposit payments started crediting the checking and savings accounts of my fellow countrymen earlier this week. Most of us will receive a benefit of $1,200, some will receive a lesser amount and others will receive nothing. What do you do with this sudden inflow of money?

One of the most basic strategies of using your stimulus benefit is to establish a plan that addresses your most critical needs. For example, if you are in need of shelter, food or medicine, you should utilize the funds for these purposes. What if your mortgage is a federally-backed loan (such as FHA loans)? You may be granted payment relief for 6 – 12 months! If you are renting, perhaps your landlord will allow you to defer a month or two so that you can focus on the more important matter of your health. Any medicines you may require to maintain your health would be the focus for using your stimulus check.

If your basic living needs are met, you should consider saving the stimulus funds to enhance your emergency funds. It is vital that you maintain a minimum of 60 – 90 days of living expenses in a readily available account for emergencies. Guess what? The current pandemic we are living through is one of the emergencies for which this fund would be utilized! By maintaining access to funds that will allow you to live your life as you desire, at least for a period of time despite the ever-changing world around you, is both comforting and empowering. To know that your lifestyle can continue through times of struggle gives you the mental confidence to meet other challenges that may arise in life.

Let’s assume that you accumulated ample savings in your emergency fund. You may wish to review your debts and pay down, or even better pay off, certain high interest debts such as credit cards. I am not a big fan of credit cards due to the ease of abuse of such unsecured credit that allows individuals to live beyond their means. The phrase my father often tells me come to mind pertaining to credit cards – “give a man enough rope and he will hang himself”. During times of economic distress, many credit card companies will lower your interest rate for a period of time, if you contact them, and have been making your payments consistently and on time. Once the card is paid in full, place it in a zip-lock bag, then place the bag in a plastic container of water. Next, place the container in your freezer. This will require some effort on your part to free the card from the ice causing you to expend energy and time thinking about the use of the card.

Should you have none of the above needs, consider yourself a lucky person! The use of your stimulus benefit could be a very positive act such as contributing to an Individual Retirement Account (IRA) for a tax deduction. By saving for your future with an IRA, you will be preparing for the future in a bold way. Your needs are met today, for the next 90 days and for your future!

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The Millennial Perspective: Starting Late, Retiring Fearless

According to Pew Research Center, Millennials are individuals born between 1981 and 1996. We grew up in a time before the internet was a part of everyday life and playing outside or playing video games were the best options to keep us occupied. We grew up in the rapidly changing age of technology and social media. We also, unfortunately, grew up and are still facing the ramifications of the Great Recession of 2008. This has brought on a number of financial concerns among Millennials and has caused delay for many milestone events, such as buying a home and starting a family. The average Millennial makes $35,592 a year and has a net worth of less than $8,000 according to Business Insider. The average Millennial also has a student loan balance of roughly $30,000 for four years of college. The lower income and high cost of student loan debt on top of the cost of living makes it hard to start a life and save for the future.

As any Millennial would do, I took to social media to gather the opinions of my fellow Millennials about what concerns they faced regarding their financial future. Much to my surprise, several people joined in the conversation. Some said that their biggest concern was paying off student loans, others said buying a home, saving for their children’s futures, or starting a family in general. We will touch more on those subjects later, but one of the most popular answers I received was saving for retirement. Many of us are told to start saving for retirement as early as possible and many of us fear about the future of Social Security. However, when it comes time to set up our 401(k), 403(b), or whatever kind of retirement plans are available, if any, from our employers we find that the suggested amount to invest in the plan is far more than we can afford and still have a comfortable lifestyle. I remember when it came time to sign up for the retirement plan at one of my jobs which I thought paid fairly well for someone my age. The suggested investment each month was a third of my total gross pay, or in other words, the pay before any taxes or deductions. This would have left me with just enough money to pay my rent, my car note, and utilities each month. I, unfortunately, opted out of saving for retirement at that time. 

So, how do we start to save for our futures when we can hardly afford the present? Balance. It is important to find a good balance between what you need to live, what you can save for the future, and still have some funds left over to pay yourself, even if that means setting aside more savings. How do you find this balance? Planning. Sit down and look at how much you are making and how much you are spending, and create a budget that works for you and stick to that plan. Even if you are not investing in a retirement plan with your employer, you can start to save for your future. It doesn’t have to be much to start, but we have to start somewhere. Talk to a Certified Financial Planner™, get a second opinion if you have to, do whatever you need to do to feel comfortable when making these kinds of decisions and ensure that you are making the right choices to plan for your future. Retirement doesn’t have to be a lost cause or a fantasy for Millennials. As Jonas Salk said, “Hope lies in dreams, in imagination, and in the courage of those who dare to make dreams into reality.”

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Liquidity is Everything!

One of the most frightening stories I have heard about a retiree is the one where her daughter came to our office and her face was ghostly pale. No, this isn’t a fictional character. Sadly, this story is too often told and true. Our client’s mother had been talked into an investment that “guarantees her a return with a bonus paid up front”. This particular investment sounds good but the problem was the mother’s age was 89 years young! Suitability is the key word for this type of investment. 

Investments that require prolonged surrender periods, the time at which you can recover your original investment without a penalty, should be skeptically analyzed for appropriateness for the investor. In the present instance, our client’s mother was 89 years of age and the investment had a surrender period of 12 years. Her mother would be 101 years of age before she could recover her $300,000 original investment. I will admit that U.S. citizens are living longer that that experienced in the 1860’s but the likelihood of living to 101 and not needing her funds for medical care is improbable. 

Not only did her mother invest the $300,000, she had very little liquid funds available should in-home aides be required or nursing home care admittance become a necessity. By investing in illiquid, long-term investments, the client’s mother would not experience the type of lifestyle she was accustomed. Diversification is an excellent tool to minimize exposure to this type of danger. These products are not illegal or unusual. The biggest hurdle for many people is that the products are sold by individuals with a benefit for themselves. Commissions on some of these products can be 10% or higher. 

A better alternative is to utilize investments that ladder or vary in maturity. For example, if you need fixed income interest payments, perhaps you would want to purchase individual, highly-rated bonds with varying maturity dates. Some jumbo certificates of deposit may be utilized for laddering purposes so that your interest rates vary depending on the term of the deposit.

If something sounds too good to be true, it usually is. There is no substitute for sound, independent, financial advice delivered by a fiduciary advisor. Select someone that does not have a vested interest in the sale of the product but rather the success of the client’s investment in meeting their goals. As a Certified Financial Planner™ professional, it is our policy and process to place the client’s interests ahead of our own. There is another old question I ask some of my financial professional colleagues that brings this thought to light: “Would you invest your mother’s money in the same way as you are recommending your 89 year old client?”. 

Don’t take chances with your financial security. Apply generally acceptable and proven strategies for meeting your family’s needs. Let’s end this column with a quote from Warren Buffet, “Risk comes from not knowing what you are doing.” See you on the golf course!

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Should I Change My Investment Approach In Retirement?

While accumulating assets for retirement, many people utilize an employer retirement plan that allows consistent contributions while investing in a growth model. Their approach is to maximize the matching contribution from their employer and, perhaps, assume more risk than they would otherwise assume because of continued contributions. Let’s review the process of investing during retirement and the differences one will encounter throughout the distribution phase of the portfolio.

The most prevalent concern of any retiree is running out of money. To confront this fear, most retirees make the most critical mistakes with their investments. First, to seek safety in the portfolio, the retiree will change from a balanced portfolio of equities and bonds to a bond-dominant portfolio. Thinking the cash balance approach secures their cash during the contraction of the markets, the larger peril to the portfolio is the lack of participation in the expansion phase of the market cycle. In layman’s terms, the rate of return on most bonds will not be sufficient to maintain the retiree’s purchasing power during retirement. Rising costs of living expenses such as medical care, housing, food and other basic needs will preclude the portfolio from providing excess cash flow to the retiree unless the total portfolio is significant.

To resolve the concern of running out of money, we work with our clients to develop a sound investment approach that addresses inflationary pressure, periodic cash distribution requirements and market risk. One of the most effective tools to combat risk is to diversify. At the time of retirement, many of our clients will participate in an economics lesson. Albeit a short lesson, we simply ask, “how would you feel to be out of money and healthy?” This question is one that causes their face to wrinkle and the eyebrows to furrow. Typically, the answer given us is “I would not feel comfortable at all!” 

Obviously, we knew their answer but the exercise is one that makes them confront what risk truly is in their lives. So many people believe risk to be simply the loss of principal in their account. However, the greatest risk is outliving your means of support to where your longevity is not rewarded with peace and tranquility but rather anxiety. Our independent research has proven that most retirees sleep better at night knowing they will not be subjected to the need for family or state support. Independence is the reward for investing properly.

Seek out the advice of an independent financial advisor that specializes in retirement planning. You deserve a specialist for this phase of life just like your cardiovascular surgeon if you have health issues with your heart. If you have questions regarding your financial future, why not gain assurance that you are making the right decisions for your family? A visit with a Certified Financial Planner™ practitioner may give you the confidence you need to live your life in a manner you desire instead of simply existing. 

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Last-Minute Retirement Planning Ideas

When you look at the calendar and realize another year has passed, it is time for a few more strategies to enhance your retirement account. Some of these actions may seem simplistic in nature but investing is not as difficult as many people would like you to believe. Investing in a diversified portfolio and rebalancing periodically is about as simple as any process can be for protecting your future.

Before you leave the office for the holiday season, consider reviewing your current portfolio within your employer-provided plan. 2019 has been a year of significant market growth in the United States. Record highs have been reached this year and this is a good result for most equity investors. With such growth in a diversified portfolio it is likely that your risk level within the portfolio has increased, too. 

To maintain the acceptable level of risk you originally desired at the onset of your portfolio development, it is critical to sustain the original allocation. This is accomplished by rebalancing your portfolio based on one of two methods: 1) time; or 2) asset class. This example is purely for educational purposes. When the portfolio was originally established, you may have chosen a 50/50 equity to fixed income allocation. Considering the markets have been very positive on your portfolio and your allocation has expanded to 60% equities. Based on the current allocation, you are now experiencing a greater level of risk than you desire.

By performing the task of rebalancing (i.e., selling your equities and buying more fixed income) you are keeping your level of risk in line with your original target. This strategy is the basis for most theories of portfolio design and risk acceptance. However, you must possess a degree of discipline that does not become greedy when times are good and fearful when the economy is contracting. As an anecdote, we often inform our clients that they must “be fearful when others are greedy and greedy when others are fearful.” The stock markets are auction-based markets. Someone must be selling something for someone to buy it. This belief applies to new issues when a company desires to “go public”. The issuer of the stock is asking for a certain price (i.e., Initial Public Offering Price our IPO) and the public may desire to buy at that price.

Another yearend strategy we recommend is a review of the individual assets classes within an allocation. For example, small cap stocks performed excellently in 2017 and declined in performance in 2018. However, in 2019, the asset class is, once again, performing well. I am not saying that you should own small cap mutual funds. As an illustration, you should review each of the different assets classes and determine the inherent risk within your portfolio.

To help our clients control the amount of risk within their portfolios, we developed a system that “stress tests” their holdings and overall allocation. By analyzing the risk of the portfolio, the investor can be more comfortable knowing their portfolio is not invested at levels of risk that cause them worry. Also, we believe diversification must be achieved in market sectors and geographically to control the risk component.

If you are confused by some of the language in this article, don’t let it keep you from moving forward to protect your future security. You may wish for someone to “stress test” your holdings, asset allocation and project potential for your future. Seek out a Certified Financial Planner™ practitioner and CPA that can help guide you through the confusion and help you reach your goals in a non-emotional and logical manner. 

For additional, free information about managing your portfolio in a manner that allows you to sleep at night, go visit the Compass Capital Management website. You will find a wealth of information to help you navigate life!

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Time is Running Out

As a calendar-year, cash-basis taxpayer, you will have fewer opportunities to reduce your 2019 income tax burden once the calendar rolls over to 2020. By taking a few simple steps today, you will see a better result when you file your income tax return in April, 2020.

If you participate in a Flexible Spending Health Plan, referred to as a “cafeteria plan”, through your employer, it is critical that you utilize (spend) your elected deferral amount for 2019. The IRS has liberalized the rules regarding the ability to claim qualified medical expenses and you may carry over a small portion of your elected deferral amount to a following year. Discuss your options with your company’s Human Resource Officer for your particular plan.

Consider paying your total advalorem tax assessment in full prior to December 31, 2019. The Tax Cuts and Jobs Act of 2017 increased the amount of standard deductions to such levels that most individuals will not incur sufficient qualified itemized deductions to file a Schedule A – Itemized Deductions Form – with their returns. Analyze your current level of qualified deductions to determine if you exceed your standard deduction of $12,200 for individuals or $24,400 for married filing joint taxpayers. A lowered state tax may be an added incentive to itemize deductions on your federal return. 

What if you could take a deduction on your tax return for something that doesn’t require your current cash? You may receive an increased benefit by donating appreciated stocks to qualified charities. The process requires that a donor (you) physically donate the certificate of the shares to the charity instead of selling the stock and donating the proceeds. You will receive a tax deduction based on the fair market value of the stock on the date of the donation (transfer). Since the charity is generally exempt from federal and state income taxes, the charity will sell the stock and receive the much needed cash it desires to run its programs. For example, you may have basis in the stock of $1,000 and the fair market value has risen to $10,000. Your charitable deduction is $10,000 (your deduction is limited to 30% of your adjusted gross income). You do not realize the $9,000 capital gain that would be taxed if you sold the stock. It is a win-win situation!

Lastly, review any employee benefit elections for 2020 that are required this month. Most employer-provided retirement plans utilize an enrollment period in November or December of the current year to elect the amount of contributions for the next year. One of the most effective and efficient tax deductions is the contribution to your retirement. Maximizing this election will save federal and state income taxes as well as receives growth via the employer matching contribution. We advise clients to defer at least the matching percentage provided by the employer so that you literally “double” your money notwithstanding market conditions.

Be proactive in your finances and retain more discretionary income for your family. If you want additional information on the above tax strategies and other financial planning methods to help your family reach its goals, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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It’s All Taxable, Unless…

All of your income is taxable! This is the premise of the United States Government. However, provisions are addressed through tax legislation that allows certain types of income to be partially taxable or fully exempt from taxation. How do you know which income is tax-free? Is it unpatriotic to pay the least amount of income taxes you lawfully owe? 

Well, lets get one thought out of your mind. Judge Learned Hand, U.S. Court of Appeals in the early 20th century, is credited with stating “nobody owes any public duty to pay more [taxes] than the law demands.” What is fair in our system? The U.S. tax system is based on the honor of its citizens and their willingness to remit taxes timely for the efficient function of the government.

The Internal Revenue Code of 1986, as amended, provides us guidance in the treatment of assets and monies received during the course of the year. For those of us employed, the compensation received from our employers is taxable. However, what about the gift received from Aunt Sally? Is there a limit to what she can give you? Good news! As a beneficiary, or donee, of a gift, of any size, you owe no federal or state income taxes. That means, you could receive a gift of $10,000,000 and owe no income tax. Wow! If that is true, why do we pay tax on other income that is not “earned” during employment?

Section 61 of the Internal Revenue Code states, “… gross income means all income from whatever source derived…” For an item of income to be exempt from taxation, the item must meet specific criteria within the Internal Revenue Code. How does anyone make sense of all of this legal speak? It is critical to understand your tax situation since this expenditure is one of the largest allocations of most individual’s annual budget.

Does this mean your Social Security Benefits are taxable? The answer is maybe. If your income from sources, other than the Social Security Administration, exceeds $25,000 as a single filer or $32,000 as a joint filer, you may have to pay tax on a portion of your benefits. To illustrate the changes in tax laws, the process used by Congress to create revenue for the federal government, in tax years prior to 1987, individuals were not taxed on their Social Security Benefits. Tax laws change, literally, daily.

The solution to this income tax conundrum is to seek a tax adviser that not only understands the tax laws but specializes in planning. Our role as wealth advisors, for our clients, is to provide guidance on the critical areas of their finances that may impair the clients’ abilities to live a life by design. Don’t simply sign your returns each year and send them off hoping for the best. To gain more confidence in your tax responsibilities, seek out a CPA and Certified Financial Planner practitioner that understands the interaction between your planning for the future and the impact of taxation on your investments and income. You can truly take control of your taxes. In the words of Nike, JUST DO IT!

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