Where to invest emergency fund??

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Where to invest emergency fund??

Postby coldman » Sun Mar 21, 2010 12:55 pm

Since savings accounts and money markets are paying so little where is the best place to invest emergency funds? I have thought about using the Vanguard High Yield Tax-Exempt Bond fund. I want the money to grow faster than inflation, but I don't want to be nailed on taxes. Does anyone have any thoughts or suggestions about where to invest emergency funds so the will make some money? I have read that bond funds are expected to go down. The money would only be used if lost my job or had a major need. Would it be a better idea to use one of the high paying online banks such as ING or Alley? They have saving/checking accounts that are paying 1.25%, which is not big money. Please share your thoughts and ideas. :lol: :) :shock: 8) :roll:
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Re: Where to invest emergency fund??

Postby YDNAL » Sun Mar 21, 2010 1:04 pm

coldman wrote:Since savings accounts and money markets are paying so little where is the best place to invest emergency funds?
coldman, welcome to the Bogleheads Forum.

Consider a tax-deferred placement.
Cash Needs in Tax-Advantaged
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My idea....

Postby spinkter » Sun Mar 21, 2010 1:05 pm

My idea of an emergency fund is cash on hand........Go out and buy a safe and try to save $10,000 grand to have ON HAND. Nobody is making money these days unless you have large amounts of capital on hand to bet the ups and downs on hedge funds, so you might as well keep the cash ready for yourself.
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Postby zotty » Sun Mar 21, 2010 1:05 pm

No Free lunch. If you reach for yield, you are adding the risk of loss of principle. With anything "High Yield" or "Long Term", you need to be ok with a 25% drop? [at any time]

CDs are a good choice. I-Bonds are pegged to inflation and have tax advantages, but the rate is pretty crummy right now too.
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Postby chaz » Sun Mar 21, 2010 1:23 pm

zotty wrote:No Free lunch. If you reach for yield, you are adding the risk of loss of principle. With anything "High Yield" or "Long Term", you need to be ok with a 25% drop? [at any time]

CDs are a good choice. I-Bonds are pegged to inflation and have tax advantages, but the rate is pretty crummy right now too.



I agree : CDs.
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Where to invest emergency fund??

Postby johnubc » Sun Mar 21, 2010 1:33 pm

Having the money is a safe makes it too easy for me to tap into it when I am too lazy to go to the bank.

Myself, I have it in an online account - I can do an EFT into my main checking account, and also get at it through an ATM. If I really need to get to the cash quickly, I can drive to a branch (HSBC), although it is not convenient.
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Where to invest emergency fund??

Postby coldman » Sun Mar 21, 2010 1:36 pm

Would anyone consider the High Yield Tax Exempt Fund from Vanguard or the Long Term Tax exempt? My thought is a little risk for money to keep growing at an inception rate of 5% plus is not bad. Share your thoughts people.
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Re: Where to invest emergency fund??

Postby avalpert » Sun Mar 21, 2010 1:43 pm

coldman wrote: My thought is a little risk for money to keep growing at an inception rate of 5% plus is not bad. Share your thoughts people.


That's what I-Banks thought too with thier reserve assets - right up until the point that the emergency happened.

Safety and liquidity are the only concerns for an emergency fund - yield is a secondary distraction and if it comes at the expnese of the first two is a dangerous distraction.
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Unsuitable emergency funds.

Postby Taylor Larimore » Sun Mar 21, 2010 1:48 pm

Hi coldman:

Would anyone consider the High Yield Tax Exempt Fund from Vanguard or the Long Term Tax exempt? My thought is a little risk for money to keep growing at an inception rate of 5% plus is not bad. Share your thoughts people.


Sorry, but a high yield (junk) fund and long-term bond fund are inappropriate for an emergency fund (defined as a safe fund for immediate access).

High Yield Tax-Exempt Fund fell -19.0% during 1981 and declined -10.5% in 2008.

Long Term Tax Exempt Fund plunged -24.2% during 1981 and declined -4.9% in 2008.

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Re: Where to invest emergency fund??

Postby livesoft » Sun Mar 21, 2010 1:53 pm

coldman wrote:Would anyone consider the High Yield Tax Exempt Fund from Vanguard or the Long Term Tax exempt? My thought is a little risk for money to keep growing at an inception rate of 5% plus is not bad. Share your thoughts people.

We keep our so-called emergency fund money in two funds: Vanguard GNMA and Vanguard Short-term investment grade bond funds. Both funds are held in tax-advantaged accounts. We are not risk averse.

If an emergency occurred, we would first use cash-flow in checking, then credit cards. This would give a more than enough time to get the money out of those bond funds into our sweaty little palms.

I have never seen anyone need $10,000 from a safe all at once on a Tuesday afternoon. Large amounts from an emergency are related to job loss, so one would only need to replace income over several months. If I felt my emergency fund of a few months expenses had a chance of losing 10% of its value over that time, then I would just have an emergency fund that was 10% larger than you would have.

3-year performance numbers of GNMA and Short-term investment grade:
6.7% and 5%, respectively. That's a higher rate than my fixed rate mortgage.
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Re: Where to invest emergency fund??

Postby avalpert » Sun Mar 21, 2010 1:58 pm

livesoft wrote:

I have never seen anyone need $10,000 from a safe all at once on a Tuesday afternoon.


I haven't seen, but my grand parents lived it. Fat tail events are real and dangerous - reasoable preparations seem prudent. Taking $10k out of a mid six-figure portfolio and sacrifice a few hundred dollars in yield a year doesn't seem like a big hit for real protection against extreme, if unlikely, risks.
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Self discipline

Postby spinkter » Sun Mar 21, 2010 2:09 pm

Keeping 10,000 in cash on hand can also keep your discipline. If you plan on spending your emergency fund better not have one and resort to the bank method instead BUT I do have discipline and I will keep it just where I have it.
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Where to invest emergency fund??

Postby coldman » Sun Mar 21, 2010 2:20 pm

Eventually I would try to get up to $30,000 just in case of a job loss. The money would be in addition to about $6,000 in a savings account.
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Postby livesoft » Sun Mar 21, 2010 3:16 pm

@avalpert, please tell me how your grandparents needed $10,000 all at once. Did they have to bail your dad out of jail?

Actually, that goes for anyone. Who has ever needed $10,000 in cash all in an afternoon? Please let us know the details.
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Postby avalpert » Sun Mar 21, 2010 3:22 pm

livesoft wrote:@avalpert, please tell me how your grandparents needed $10,000 all at once. Did they have to bail your dad out of jail?

Actually, that goes for anyone. Who has ever needed $10,000 in cash all in an afternoon? Please let us know the details.


They needed to bribe and support thier way from the backwoods of Poland to Palestine. Sure, it took more than one afternoon but it wasn't like they had easy access to ATM's and thier online brokerage along the way.
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Postby LadyGeek » Sun Mar 21, 2010 3:28 pm

Please see Emergency fund on the Bogleheads Wiki.

In particular, checkout the first forum discussion thread under External Links.
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Postby livesoft » Sun Mar 21, 2010 3:37 pm

That is a good example, but you have to admit it won't apply here unless the OP has relatives that they need to smuggle across a border. But I think the possibility of such a case would be known, wouldn't it?

I can see folks needing ransom money on short notice. I can see folks needing bribe money perhaps when they travel to unsavory places.

I did pay off a $25K 0%-interest loan by using my emergency fund as I described. It did take 3 days to get the money out of my account. I then immediately re-filled the emergency fund with a new $25K loan at 0% interest rate.

I can't understand spinkter's comment about discipline. What's up with that?
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Postby avalpert » Sun Mar 21, 2010 3:44 pm

livesoft wrote:That is a good example, but you have to admit it won't apply here unless the OP has relatives that they need to smuggle across a border. But I think the possibility of such a case would be known, wouldn't it?


I think the point is more that it seems as though it won't apply here - but who knows. I mean what if Ron Paul wins the presidency?

The way I would look at it is what is the cost of this 'insurance', for an emergency fund that is less than 2% of my portfolio, I think I can handle it just in case. Ekeing out every potential return can be costly when you can least afford it (I know a few companies that wish they had more cash and less reliability on commercial paper for accesible funds two years ago).
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Postby livesoft » Sun Mar 21, 2010 3:54 pm

Let me give a few emergencies that I have been through.

1. Tornado hit the neighborhood. All power lost. All homes across the street leveled. High school destroyed. Cash needed to keep going: $0. Plenty of free food from relief efforts.

2. Hurricanes caused damage to homes, trees, power in the neighborhood. No power for either a day or a week. Cash needed: $0. Stores had no electricity, so no perishable foods were available. It was easy to drive a few hundred miles out of the disaster zone.

3. Wife threw away all the traveler's checks on the first day of honeymoon. Cash needed: $0. Since we were in an isolated area, no chance to replace traveler's checks, so had to use credit cards instead.

4. Wife calls from Portugal. "My purse was stolen. It had all my money and plane tickets in it. Help!" Cash needed: $0. The ticket was from a consolidator and not paid with a credit card. This was a little tricky because I had to twist some arms over the phone to get a free replacement ticket. Credit cards met the rest of the need.

5. Car hit by unobservant driver. Needed new car. Cash needed: $0. It took a few days shop for a car. In the meantime, we used our other car. I guess we would've rented a car if we didn't have 2 cars. Bought a car with a check a few days after the accident.
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Postby spinkter » Sun Mar 21, 2010 4:57 pm

you don't understand discipline, whats up with that?
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Postby mikestorm » Sun Mar 21, 2010 5:00 pm

My emergency fund is a $65K HELOC. It utilizes the equity in my house, the rate is under 4% and is tax deductible, and there is zero opportunity cost of keeping cash out of the market. Accessible via check or electronic advance to my checking.

I noticed that not many people on this forum go this route. Is there a downside that outweighs the benefits?
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Postby Opponent Process » Sun Mar 21, 2010 5:02 pm

you can always sell a kidney.
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Postby avalpert » Sun Mar 21, 2010 5:07 pm

mikestorm wrote:My emergency fund is a $65K HELOC. It utilizes the equity in my house, the rate is under 4% and is tax deductible, and there is zero opportunity cost of keeping cash out of the market. Accessible via check or electronic advance to my checking.

I noticed that not many people on this forum go this route. Is there a downside that outweighs the benefits?


It can be cancelled - and often at the most inoppurtune time for an emergency fund. Many people had their heloc cancelled as property values collapsed at the same moment they were laid off with rising unemploymet.
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Postby grap0013 » Sun Mar 21, 2010 5:11 pm

Everbank all the way baby! Always near the top for both savings and checking and GREAT customer service. All FDIC insured. Some banks lure you in with high rates and then change at the drop of a hat. These guys are consistently in the top 10% and you don't have to chase rates.

If this is truly an emergency fund I wouldn't put it into any bonds because interest rates are likely to be rising in the near future dropping bond prices. I wouldn't put it into CDs either because that money is locked up (also bad when interest rate rises. Everbank's rates will rise with rising interest rates. The point of an emergency fund is you can get to it really fast and you know how much is in there. Not floating value. Only after I had 12 months expenses built up would I look to bonds and CDs.
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Postby grabiner » Sun Mar 21, 2010 8:17 pm

mikestorm wrote:My emergency fund is a $65K HELOC. It utilizes the equity in my house, the rate is under 4% and is tax deductible, and there is zero opportunity cost of keeping cash out of the market. Accessible via check or electronic advance to my checking.

I noticed that not many people on this forum go this route. Is there a downside that outweighs the benefits?


The downside is that the line of credit may be canceled if you lose your job, which is one of the most common reasons for needing an emergency fund.
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Re: Where to invest emergency fund??

Postby grabiner » Sun Mar 21, 2010 8:23 pm

coldman wrote:Since savings accounts and money markets are paying so little where is the best place to invest emergency funds? I have thought about using the Vanguard High Yield Tax-Exempt Bond fund. I want the money to grow faster than inflation, but I don't want to be nailed on taxes.


Choose a different muni-bond fund, then. The problem with High-Yield Tax-Exempt is that it invests in lower-quality municipal bonds, which means that it is significantly riskier than other bond funds; it lost 11% in a few months in the fall of 2008, along with the decline in the rest of your portfolio. Long-Term Tax-Exempt lost 7% in the same period, so the yield difference is a small price to pay for that risk reduction. For an actual emergency fund, I would recommend Limited-Term Tax-Exempt, which had only a 2% loss; the returns are lower, but the lower correlation with stocks means that you can increase the risk of the rest of your portfolio.
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Re: Where to invest emergency fund??

Postby nisiprius » Sun Mar 21, 2010 8:50 pm

coldman wrote:Since savings accounts and money markets are paying so little where is the best place to invest emergency funds?
Just because they are paying so little does not mean there is any better place to invest them, even though we may wish there were.

You just have to start from first principles. What is your reason for having an emergency fund, how much do you need to have in it, what characteristics do you want the fund to have? Most likely, if the answer was "savings accounts and money markets" before, it is still "savings accounts and money markets" today. You could always have earned more by taking risk and accepting account fluctuation, but you chose not to. Very likely your reasons still apply.
I want the money to grow faster than inflation, but I don't want to be nailed on taxes.
We all want this, but we can't always have what we want.

Interest rates on safe, cash-like investments are just really low now, it's just the way it is.
Does anyone have any thoughts or suggestions about where to invest emergency funds so the will make some money?
I try to "make some money" in my investments. For my emergency fund, I want safety, stability, and liquidity. It's nice when they make some money, but it's just icing on the cake.
I have read that bond funds are expected to go down.
Bond funds fluctuate. They are a lot less risky and fluctuate a lot less than stock funds, but they fluctuate. The fluctuations last for periods of time that are roughly as long as the bond fund's average duration, e.g. about four years for Vanguard Total Bond Market Index Fund. I don't try to time the market, I just accept the fact that they fluctuate and use them for long-term investing, figuring it will all pretty much even out in about four years.

You have to look at some "hypothetical growth charts" for the bond funds you are interested in and decide whether it would upset you to put $10,000 in an "emergency fund" and see a balance of $9,500 in it at the moment when you actually needed the cash.
Would it be a better idea to use one of the high paying online banks such as ING or Ally? They have saving/checking accounts that are paying 1.25%
Well, I moved most of my cash from money market mutual funds to my ING direct account.
...which is not big money.
No, but it's "safe as money in the bank."

I have $25,000 in one of those tricky "reward checking" deals that pays 3%, but only if I make a dozen point-of-sale purchase a month with my ATM card and one direct deposit a month. So I make $750 a year out of that. Big whoop, but it's something. While it lasts. Bank interest rates are dropping all over the place. By the way, you're out of date if you think ING pays 1.25%, they've dropped it to 1.10%.
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Postby BigD53 » Mon Mar 22, 2010 10:33 am

Congratulations coldman!

You have just submitted the 1,237th post of:

"Where Do I Invest My Emergency Fund." :yawn :lol:

Answer: Savings account. Cd. Bond fund. Under your bed.


:peace
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Postby BigD53 » Mon Mar 22, 2010 11:01 am

Read this article by Christine Benz: "Dont Get Cute with Your Cash."

http://news.morningstar.com/articlenet/article.aspx?id=330018


:peace
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Postby livesoft » Mon Mar 22, 2010 11:36 am

From the link:
Christine Benz wrote:I'm not suggesting that short-term funds can't play a worthwhile role in a portfolio. They definitely can. But when it comes to the part of your portfolio you truly need to keep safe, stick with cash.

I agree.

However, I do not believe that one's emergency fund is a part of your portfolio that you truly need to keep safe. For myself, fluctuations of 10% in my "emergency fund" are just fine.

Let me give an example. Suppose I need $25,000 in an emergency fund to cover 10 months of expenses. If it drops by 10%, then I have only $22,500 which will cover 9 months of expenses.

If I put $25,000 into a money market fund earning 0.01% per year, I get only $2.50 a year of interest and all my $25,000 whenever I need it.

If I put $25,000 into a short term bond fund yielding 2.5%, then I possibly get $625 and perhaps $25,000 back or maybe $22,500 back. If I really needed $25,000 back at a minimum, then I can start with 110% of $25,000 in my emergency fund or $27,500. If I lose 10% in it, I will still have the $25,000 that I think I might need. In the meantime, I might be making $700 a year in dividends.

Of course, you do not want to pick an extremely risky bond fund to do this. You want to pick a more conservative bond fund ... maybe one that Vanguard put a risk rating of 1 or 2 on.
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Postby BigD53 » Mon Mar 22, 2010 11:52 am

Thank you livesoft. Very good suggestions.
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Postby nun » Mon Mar 22, 2010 12:29 pm

For me zero risk and liquidity requirements for my emergency fund so I keep it in cash in the bank
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Postby nisiprius » Mon Mar 22, 2010 5:01 pm

livesoft wrote:From the link:
Christine Benz wrote:I'm not suggesting that short-term funds can't play a worthwhile role in a portfolio. They definitely can. But when it comes to the part of your portfolio you truly need to keep safe, stick with cash.
However, I do not believe that one's emergency fund is a part of your portfolio that you truly need to keep safe. For myself, fluctuations of 10% in my "emergency fund" are just fine.
I'm pretty much with you. My feeling is that "an emergency is an emergency." If it's liquid and not down too much when I need it, I'd use it without regret and be glad I had it to use. My own everything-spreadsheet actually categorizes my bonds and TIPS as "level 3 emergency reserve," level 1 being cash-equivalents and level 2 being I bonds.

The big concern is how much of your net worth the emergency consumes. If it's 1%, then it's not serious, and it hardly matters whether the asset is down a bit, forcing you to liquidate 1.1% of your shares, or up a bit, forcing you to liquidate 0.9% of them.

If it's 50%, then it's very serious, but even then 45% is almost as serious as 55%.

There are three points that I'm adamant about, though.

First, people need to be very clear that a bond is not just a CD on steroids, and that a bond fund--even a short term bond fund--is not just a super-duper money market fund.

Second, nothing has changed recently that would affect one's decisions about what assets to use for emergency cash. If you don't mind 10% fluctuations and don't want to forego several percent more growth over the long term, then you should always have kept your emergency reserve in a bond fund. If, for whatever reasons, good or bad, you do have a segregated emergency fund, and it would bother you to put $10,000 into it one day and see $9,500 two months later, then you should not be using a bond fund as an emergency fund.

Third, despite what fools have written, keeping funds that you have decided to segregate as "emergency money" in stocks, even the bluest and chippiest, is reckless foolhardiness.

This is, of course, completely different from saying "I will manage my portfolio as a unit, I will not segregate an emergency fund at all, I plan to tap my portfolio as a unitary whole as need arises... so my emergency fund has the same asset allocation as everything else."

I tend to think some of the advice about maintaining a segregated emergency fund may assume that everything else you have is in one of those 90%-stocks target retirement funds!
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Postby mikep » Mon Mar 22, 2010 7:17 pm

livesoft wrote:From the link:
Christine Benz wrote:I'm not suggesting that short-term funds can't play a worthwhile role in a portfolio. They definitely can. But when it comes to the part of your portfolio you truly need to keep safe, stick with cash.

I agree.

However, I do not believe that one's emergency fund is a part of your portfolio that you truly need to keep safe. For myself, fluctuations of 10% in my "emergency fund" are just fine.

Let me give an example. Suppose I need $25,000 in an emergency fund to cover 10 months of expenses. If it drops by 10%, then I have only $22,500 which will cover 9 months of expenses.

If I put $25,000 into a money market fund earning 0.01% per year, I get only $2.50 a year of interest and all my $25,000 whenever I need it.

If I put $25,000 into a short term bond fund yielding 2.5%, then I possibly get $625 and perhaps $25,000 back or maybe $22,500 back. If I really needed $25,000 back at a minimum, then I can start with 110% of $25,000 in my emergency fund or $27,500. If I lose 10% in it, I will still have the $25,000 that I think I might need. In the meantime, I might be making $700 a year in dividends.

Of course, you do not want to pick an extremely risky bond fund to do this. You want to pick a more conservative bond fund ... maybe one that Vanguard put a risk rating of 1 or 2 on.


Or you could put in I-bonds and earn 3.36%, state/local tax free and no downside risk to principal. Gradual, since you can't cash in for the first year of course. http://www.forbes.com/2010/01/15/i-bond ... dauer.html
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Postby livesoft » Mon Mar 22, 2010 7:32 pm

I like the idea. I think I'm gonna have an emergency buying spree of I-bonds.
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Postby itboglesthemind » Mon Mar 22, 2010 7:40 pm

Ally Bank 5-year CD.

Rates a little over 3% right now, and you can cash out anytime with only 2-months interest penalty.
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Postby BigD53 » Mon Mar 22, 2010 9:33 pm

I-bonds are a good deal. Too bad the Gov reduced the purchase limit.

With regards to buying I-bonds online through Treasury Direct, I would make certain that your beneficiary/co-owner is familiar with that website, knows the password and is able to log on and redeem the bonds when the time comes.

Or, can they call the Treasury and redeem that way? How do they prove they are the beneficiary?
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Postby runner-guy » Thu Mar 25, 2010 1:13 pm

My wife and I have our emergency money in Vanguard Limited Term Tax Exempt. The yield isn't great right now, but it has never had a year with negative returns and it is less sensitive to interest rate changes. As other have mentioned, I would stay away from High Yield Tax Exempt. Just too much risk for an emergency fund.
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