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Color of Money

Color of Money Book Club

August Selection:

Michelle Singletary
Washington Post Business Columnist
Wednesday, August 18, 2004; 1:00 PM

This month's Color of Money Book Club selection is "Dictionary of Financial Terms" by Virginia B. and Kenneth M. Morris (Lightbulb Press). The user-friendly dictionary features colorful illustrations to better understand finance.

Post columnist Michelle Singletary and author Virginia Morris were online Wednesday, Aug. 18, at 1 p.m. ET to discuss the book.

_____Michelle's Column_____
The Color of Money

Morris is the editorial director for Lightbulb Press and oversees the editorial development of the books and Web content. She has written on a range of topics, including personal finance, investing and wine. She is the author and co-author of books such as "A Woman's Guide to Investing," "Guide to Choosing, Serving and Enjoying Wine," "The Wall Street Journal Guide to Understanding Money and Investing," the "SIA Guide to Investing" and "The Wall Street Journal Guide to Planning Your Financial Future."

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Michelle Singletary: Welcome all. We have a lot of questions so let's get started.

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Alexandria, Va.: Michelle,

I'm looking into opening 529 plans for three nieces. But, like the earlier poster, I don't have a LOT to put in, more like $100-$200 per kid per year. Is it worth it? My financial advisor/broker only contracts with one state's 529 and that requires $50 per month or fees. Do you know if some states have less costly plans? And if so, where do I go to open one?

Virginia Morris: One thing you might do is investigate an education savings account (ESA) for each child. Most places that offer an IRA are likely to offer ESAs. The fees may be less so more of your gift can be put to working compounding. You choose how the money is invested. The earnings are tax free if they're used to pay qualified expenses. And you may be able to encourage other family members to add contributions as well, up to the $2,000 annual limit per child.

Michelle Singletary: Also you should be aware that you don't have to use the 529 plan being pushed by your broker. In fact, it may cost you more because you are going thu the broker. Go to savingforcollege.com to learn more about all the state 529 plans. You are free to use any state plan. Also one thing to keep in mind Va gives residents a tax break for contributing to a 529 plan in Va. (I think it's up to $2,000. If you are worried you aren't putting in enough money every year (and any amt is so kind of you anyway) talk to the parents of your three nieces and get them to put in money too.

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Fairfax, Va.: I have about $20 in a former employers 401k plan (the failed to transfer all of the funds to my new employer). Since it was such a hassle to transfer the funds (govt approval of the status, filling out the forms, etc). Should I just tell them to send me a check, pay the $2 fine (10%) and take it as a distribution on my 2004 taxes? Is there something (any risks)I am missing by doing this?

Virginia Morris: I can understand the temptation to cash out if they won't agree it was their fault that the entire balance wasn't transferred and just finish the job. Remember, though, that your former employer will withhold 20% of the balance to prepay the taxes you'll owe. You'll be able to get any amount that isn't due in taxes and penalties back when you file your 2004 return.

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saving for a house: Hi Michelle,

I've almost finished paying off all my credit cards (no other debt) and thinking about starting to save up for a downpayment on a house. I'm wondering if there's any reason why I shouldn't put that downpayment money into an IRA? My understanding is that first time homebuyers can withdraw up to $10,000 of the principle deposited into an IRA for a house downpayment (and after 5 years draw on the returns.) Since I'm planning on buying in a couple of years, I'm going to be investing pretty conservatively, so I'm not expecting a huge return, but I figure that this way any interest I'd be earning would be accumulating tax free....and if I don't end up buying a house, then the $ would just go for a nicer retirement. Also, if the $ is in an IRA, I won't be tempted to withdraw it for fluffy things, like going on a great vacation. Overall, I think that I can save ~$500 a month: $250 for house savings, which will go into the IRA; the other $250 I'd put into my savings account - this is my emergency/save up for a new (used) car fund.

I'm already contibuting 5% of my income to my work retirement plan, and getting 5% match - this is all I can budget for retirement right now - so I wouldn't be putting extra money in an IRA solely for retirement purposes anyways.

Thanks for any advice/suggestions!;

Virginia Morris: Planning to use your Roth IRA money to buy a first home could work well for you. You seem pretty clear on the rules, and I agree that you'll have a headstart on retirement savings if you decide not to buy. Remember, though, that you may want to take a bit more investment risk with assets you leave in the account to meet long-term goals.

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Philadelphia, Pa.: I have a mortgage pay-off question.

I have a 30 year mortgage and want to put in an extra payment each year, to help pay down the principle faster over the years and decrease the interest I pay, too. Is this extra payment the amount of my monthly mortgage, or is it the amount of the principle only? ie -- if my monthly mortgage is $1500, of which $1000 isinterest, $300 escrow, and $200 principle, do I make my extra payment $1500, $1200, or $200?

I'm so confused!

Virginia Morris: Your extra payments should go to repay principal. But you can add any amount, not just the $200. For example you could pay an extra $100 each month, or one check for $1,200. Many experts advise you to send a separate check for the extra amount and mark it clearly as principal only.

Michelle Singletary: I agree with Virginia pay what you can. Don't fuss so much about the exact amount. So to keep it easy make one extra monthly payment (interest, principle whatever). And please, please be sure to mark it clearly that you are paying down the principle.

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Oakton, Va.: I quit my job two years ago to raise my children so we are now a one income family. I had a 401k at my old job and haven't done anything with it since. They send me quarterly statements and its making money but not much. Since I don't have a lot to put into it on a monthly basis where should I roll it over to? Can I do it without any penalites?

Virginia Morris: You can rollover the money in the account to an IRA without any penalty if you have your old employer transfer the money directly to your IRA. Start by asking your bank, credit union, or mutual fund company about their IRAs. You'll probably want to look for one that gives you lots of investment options and charges low fees.

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Alexandria, Va.: Hi Michelle,

My name is Mark and I would like to know are there any disadvantages to having a interest only loan for a mortgage.

Thanks!

Virginia Morris: Hi Mark,

The big disadvantage is that sooner or later you're going to have to pay the principal, either in a lump sum or by refinancing. If the rates have increased significantly, it could end up costing you more than a conventional mortgage. I might also worry about having a false sense of how little housing was costing me.

Michelle Singletary: Lots of folks are opting these days for interest only loans to help them get into a home and settle into a new house payment. But as Virginia said be very, very careful especially in this rising interest rate environment. If you need a little breathing room, I understand. But my friend you eventually will have to pay the interest piper so better soon than later.

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Columbia, Md.: Hi Michelle,
I have an interesting quandry. I recently netted about 60k from a condo sale. My husband and I are purchasing a 500k single family home with an 80/20 loan. We have no credit card debt, max out our 401k's every month, but have about 95k in student loans at 4% interest. Is it in our best interest to invest the 60k, apply it to the new mortgage (6% interest), or put it towards the student loans. I am at a loss.
Thanks.

Michelle Singletary: Why not do a combination of things. Personally having $95,000 in student loans would keep me up at night. That's a big, big number. So here's your chance to get that down a bit. Remember this -- you should only invest money you can afford to lose. Can you afford to lose any part of that $60,000? At least with your home you get a tax break. I guessing here but you might be making too much to get a tax break on paying that student loan debt. So make a dent in the student loan debt. Maybe use some of the money to pay down the 20 percent part of the home mortgage, which I'm guessing again is probably at a higher rate than the 80 percent part of the loan.

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Columbia, Md.: Our 6-months daughter has $2,800 in a savings account (presents from relatives). We want to save this money for her future use.

Is "education savings account" a good idea? What are other options?
What happens, for example, if she receives a merrit-based scholarship; will she be able to get the money out of the ESA to pay for her other expenses during her college years?

Virginia Morris: An eduation savings account (ESA) can be a very good idea because the earnings in the account are tax free if you use them to pay qualified expenses. Even a generous merit scholarship probably won't cover all her college costs, and she can use the ESA money for those. You could also check out 529 plans. But ESAs usually give you more control over how your money is invested.

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Washington, D.C.: Hello Mrs. Singletary,

I purchased a used car and have had the car in my posession for almost two years now. However, the engine has locked on this vehicle although I have kept up with my regular scheduled maintenance. I have now been told that the engine for this particular model (1999 Dodge Intrip)either locks up or the timing change goes out around 76,000 miles. I still have a balance of $7,000 on the car. Is there anything I can do about this? Is the lemon law still in effect? There have been some recalls on this vehicle (2) in one year.

Any information will help. Thank you

Michelle Singletary: I feel your pain. I'm in a similar situation. I bought a lemon two years ago and I'm hopping mad. Something is always going wrong with the darn thing. But in your case as with mine the lemon law won't help. So you face sinking more money into your current car or bailing out, which might mean piling on more debt to get another car. Sorry to say there isn't an easy and cheap answer. I've decided to bail. My husband says no use sinking more money in our lemon.

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Silver Spring, Md. RE: credit scores: If you have a credit card that you've faithfully paid for over two years and then you close it and open a new line of credit with a different cardholder, wouldn't that actually hurt a credit score (length of credit history?) I read this on equifax.com and motley fool. How about getting the new credit card and keeping the old (more established one) open while not charging against it? It seems that the key is keeping the credit score as high as possible to make sure that your rate quotes stay low.

Virginia Morris: The record of your former credit card stays on your credit history, so you won't lose the good history you've built up. The key is to go on using credit responsibily, paying on time and not opening too many new accounts.

Michelle Singletary: Actualy, Silver Spring you are right. Closing that old card could hurt your credit score. It's true that the history stays but the credit scoring model gives great weight to the length of time you've had a particular credit card. So if you want to open a new line cuz your old card sucks or you don't like the company, you might want to keep the old card active (as long as you don't have to pay a yearly fee) while you build up a history on the new card.

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Arlington, Va.: Can an IRA account be opened for a child? I know there are restrictions for how old you can be to make deductions, but I don't recall any restrictions on how young you can be to make contributions. I look back on my high school years and how much money I wasted on frivilous things (movies, bubblegum, gifts for girls) and I would like to pass on some financial wisdom to my nieces and nephews. Would an IRA be a better idea than a savings account?

Virginia Morris: You can open an IRA for a child if he or she earns income. The most you can put into the account is the amount the child earns, up to the annual cap. So if she earns $1,500, that amount can go into the IRA. As an incentive, you might agree to match the percentage of earned income the child put in as long as you don't go over the cap. In this example, she might put in $750 and you another $750. The rest of her money could be split between savings and spending. That way, you can talk about the difference in long-term and short-term goals.

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Laurel, Md.: I was reading a book "25 Money Myths" a while ago where the author discussed the 6 month emergency fund rule. Although he didn't say it exactly this way, the sense I got was that you should have 3 months expenses saved for an emergency that doesn't entail job loss; and that unemployment compensation (which usually lasts a maximum of 6 months) should be able to cover expenses for the additional 3 months.

Does this kind of emergency planning make sense to you?

Virginia Morris: The six month rule is just a suggestion for enough to carry you through. Unemployment helps, but it doesn't pay as much as you were earning. And you don't want to have to tap your other savings or use your credit cards too much while you're looking for a new job.

Michelle Singletary: Ditto. The point is save as much as you can when you have it because when something happens (job loss, illness) it's rarely enough. I'm going for a year of living expenses. It's good to think about unemployment but best to count on using your own resources.

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Hyattsville, Md.: Hi Michelle

I am a foreigner who has recently arrived in Maryland for a six-year stay. How do I get a credit history, when I have no transaction records here? Is it important to have good credit rating if I am planning on leaving eventually? Thanks

Virginia Morris: You'll probably find that you need to be able to use credit while you're in the US, even if it's to buy things on line, rent a car, or reserve a plane ticket. You won't be wasting your time by building a good credit history. One way to get started if you're being turned down for credit cards is by asking your bank about a secure card that gives you a line of credit against your savings account balance.

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Temple Hills, Md.: Good afternoon. My husband moved to the U.S. last year, and has finally gotten a social security number, employment authorizaiton card, and a job. Now he's being inundated with credit offers. He'd like to get a card in his own name to build a credit rating here, but even the offers that say "guaranteed acceptance" turn him down when he applies. His credit was perfect in the UK, but sadly that does not mean a thing here. How can he best build a credit rating? Incidentally, my credit is excellent.

Virginia Morris: You might investigate a joint card, though they are not as frequently issued as they once were. You may be able to be a cosigner on a loan he takes so he can establish credit that way. Or ask your bank or credit union about a credit card. They might be willing to link it to a savings account, or use your reputation as backup.

Michelle Singletary: Your husband might also look into getting what's called a "secured" credit card. He would have to put a certain amount of money in a savings account (anywhere from $250 to $500). Then he can charge on that card with the money in the bank being used to back up the charge. After 6 months or so he then may be able to get a regular credit card. Go to bankrate.com and type in "secured credit cards" in the search engine and you will get a list of banks offering such cards.

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Washington, D.C.: Hi Michelle.
Don't know if you've talked about this in chats since you wrote about it, but: I'm very confused. I've always been under the impression that when looking to score a mortgage, it's best to have as few a lines of credit as possible. I always assumed that entailed closing accounts that weren't essential. But several months ago i your Sunday column (late winter, early spring, maybe), you quoted credit-scoring experts saying they look down upon consumers that have been closing accounts. (Sorry, can't remember what their explanation was.) That seems a contradiction - an important one. I have several credit cards I've collected over the years that I never use -- some are because the rates and perks were eclipsed by others, others i opened as savings incentives at department stores. I always intend to get the discount that goes w/ opening the account, and then close the acounts because I have no use for them otherwise and I don't want them to be a drag on my score. So what's the bottom line w/ these excess and otherwise dormant accounts -- keep them open, or close them? Thanks.

Virginia Morris: If they aren't costing you money in the form of an annual fee, and if you have the self discipline not to use them, which it sounds like you do, maybe it makes sense to leave them in your drawer. You can even cut them up and leave them on your record if you're concerned that cancelling them might have a negative effect.

Michelle Singletary: This credit scoring stuff is complicated. True closing accounts could hurt your score for a little while -- it's long answer why but generally if you have debt on one card, closing others looks like you owe a lot to one company. Now if you're not going to be in the market for new credit anytime soon you should at least close the department store credit cards. They don't add a tremendous amt. of value to your score. But Virginia is right. If you have a regular credit card account that has been open a long time and you don't have to pay a fee to keep it open, you might want to leave that alone since it helps your score. And let this be a lesson to all out there signing up for those department or retail credit cards to get that 10 percent discount. IT'S NOT WORTH IT!

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Aspen Hill, Md.: One issue/question I have is about figuring out how much you will need in retirement. It is really tough trying to figure it out when you still have kids at home, especially kids in college. From what I can tell, from social security, pensions and savings my husband & I will have a little more than half the income we have now when we retire. Most retirement planning programs say you need about 80-100% of preretirement income. But when half of our income goes to taxes, tuition and college savings for the younger ones, not to mention how much we put away in retirement accounts, we may have more spendable income when we retire than we do now!; I am 49 and my husband is 53. We have 3 kids - one in college for the next 2 years, one starting college in a year and one starting high school this year. We will have kids in college for the next 8 years. But after reading articles about retirement planning and using on-line planners, I still worry about it and wonder why none of them seem to take into account the expenses associated with kids. It is really tough to figure this stuff out.

Virginia Morris: If you start now or keep adding even a small amount to retirement account, such as enough to take advantage of your employer's matching contribution, at least you have a head start on what you'll need in retirement. When your kids are out of college, you can redirect what you're spending on school to your own retirement accounts. Whatever you have is better than having nothing at all saved.

Michelle Singletary: See this is why I told my husband we should have gotten a dog. I had children (3) in my mid to late 30s and I facing having them in college as I approach my retirment years too. At least a dog doesn't need to be educated :)

Seriously, do what you can and don't worry too much. Cuz what will that get you -- a headache and you know how much drugs cost these days. Just keep saving as much as you can.

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Washington, D.C.: After consolidating credit cards & balances, what would your advice be on the "empty" old cards? If one is kept, which one? Oldest? Lowest rate? - ie which will look best on credit report to keep?

Virginia Morris: If you have a card with a low rate, you may want to keep that one to charge purchases that you're planning to pay off over time. If you don't use that card for your day to day purchases, you can reduce the finance charges you might otherwise owe.

Michelle Singletary: Keep older card with low rate.

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Arlington, Va.: If you tend to carry a moderate balance on a credit card, will it make a difference in how lenders see you as opposed to someone who runs up a large balance and then pays it off entirely every month? How can a credit report "know" the differenc between those two hypothetical borrowers' payment habits?

Virginia Morris: Creditors tend to love people who maintain a balance as long as they always pay the minimum that's due. Balances mean the creditors are collecting finance charges. That's not the case with people who pay their entire bill. Credit reports include the details of how much you owe, how much you pay, and the schedule you pay on. In fact there's not much about your use of credit that the credit reporting companies don't know.

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Correcting credit reports: Hi Michelle. Thanks for the column on the impact of your credit score on all of the major financial decisions of your life.

I hope you have some advice for me on the issue of my credit report. I have been fighting with Experian for three years to get another person's information off of my credit report. The other two companies have no errors on their copies of my report, only Experian. I have placed my request for an investigation in writing 6 times, and call them on a regular basis. I placed a fraud alert on my account, and still, this person was able to add another credit card to my Experian credit report (even with the fraud alert in place). Is a lawsuit the only way to resolve this problem?

Michelle Singletary: You may have to sue. A lot of consumers are doing that. I wrote about one case where the credit bureau kept putting the same bad information in a women's file. Check the internet cuz there are lost of folks in your position. However, it may be hard to find an attorney to take the case and it could cost you a bit. So, let me suggest something else for now. Have you filed a complaint with the FTC? If not do that first and cc Experian.

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Pittsburgh, Pa.: My wife and I recently purchased our first home last year. I just got a job offer out of town for a pay raise of about 85%. I am affraid of taking a loss on the home. Do I go? The move is from Pittsburgh to Houston, so the cost of living goes down. Do I sell the house, live in an extended stay hotel and purchase a new house? They pay moving (movers, hotels, milage) but not storage, or an extended stay.

Virginia Morris: Why not start by talking to a realtor about what you can sell your house for? Even if you don't make money on it, the job opportunity may be too good to pass up. And everything takes time. You may find a house to buy before you close on the one you're seliing.

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Bethesda Md.: Can you have multiple 529 accounts for the same child in different states. For example, a MD 529 and a 529 at a different state that uses a different fund family. I'd like to take advantage of programs like Upromise that take your loyalty cards (like CVS) and put a % of it into a 529 - but its a Nevada 529 with Vanguard - which i understand gets good ratings and Vanguard is a good fund company - and would also add some diversification to the T Rowe Price MD plan.

Virginia Morris: The short answer is yes, you can open different 529s in different states for the same beneficiary. The reasons you give for considering this approach make a lot of sense too, since they allow you to diversify. Just remember that keeping tract of your plans will take a little more time.

Michelle Singletary: One thing I want to add. Please don't ignore the cost of having two 529 plans. You know it cost money to have the accounts, right? So don't be so focused on what Upromise promises that you end up paying more to have two accounts. Also, remember Maryland offers residents up to a $2,500 tax break for each account. If you are spreading the money around in two different accounts you miss out on taking full advantage of having the one account in Md.

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Alexandria, Va.: I'm due to get a huge bonus at work -- like $15,000. I'd like to shelter it by depositing it in retirement account. However, would also like to put about half of it into tax-deferred education accounts for my two children, be it a 529 or Coverdell IRA. Question is can I make those education savings contributions pre-tax like I do to my 401(k) or does it have to be after-tax?

Virginia Morris: Contributions to a 529 or a Coverdell ESA are after-tax. But the big benefit is that earnings are tax free if you use the money to pay qualified education expenses. Depending on how much you have already added to your 401(k) this year, you may not be eligible to add the entire bonus in any case. Splitting it may be the best solution, or putting the amount you can't add to the 401(k) into the ESA.

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Washington, D.C.: What do you think about putting all Roth IRA contributions into a target retirement account where they adjust it for you as time goes by? Are some better than others? Is it smarter to research and choose your own mutual funds to invest in?

Virginia Morris: Both methods can work. Automatic rebalancing often carries an extra charge and some funds do it more often than necessary. That means the accounts must provide a stronger return to increase your savings as much as an account with smaller fees. If you'll take the time to follow your investments and learn as you go about when it might be time to change your investment mix, you may be happier with the results.

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Baltimore, Md.: Car buying!;!;

Michelle - I'm with you on the used car buying piece. I go one further and say that non 0% car loans are wrong, bad, and un-needed debt.

With that off my chest... my husband wants to buy his baby sister (16) a car... she's starting commuter college early and at no cost (yay!;!;) and needs a way to get there, and Mom and Dad are broke. So I think we should get her a cheap, cheap, cheap used car - but with ABS, airbags, all safety features, checked out, etc. We can't afford more than $5K cash... but my dear better half seems to think she's going to die a horrible death if we don't buy new. You have kids - what would you do? And can I convince him that a $5K used car is plenty nice enough?

Thanks!

Michelle Singletary: You said it. But I'm not sweating the car too much. I bought it used and have bought other used cars with no problem. Sometimes you just get a lemon (which can be a new or used lemon). Now as to the offer to buy the 16-year-old a car I TOTALLY agree with you. It is possible to find a safe, used car for that amount. Please, the girl's lucky she got relatives like you. I caught the bus until I could afford to buy my own car. Tell your better half I said give the girl the $5,000 and not a penny more if that is all you can afford. Hey go look at some cars it might make your spouse feel better. Still I say $5,000 is plenty enough.

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Washington, D.C.: Hi Michelle! My fiancee' has major medical debt. When we marry will I be responsible for this debt and will it affect my credit score?

Michelle Singletary: Debt your love one accumulated as a single person is his or hers. However, the debt may play a picture if you try to buy a home TOGETHER since both your credit history might be needed to qualify for the loan.

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Michelle Singletary: Well folks, so sorry but that's it for today. I'm sorry if we didn't get to your question. But remember I'll be back in two weeks AND I've been answering leftover chat questions in my new electronic newsletter. To register to get it just go to www.washingtonpost.com/newsletters and scroll down to personal finance.

Thanks for joining me today and keep saving :)

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