Are the Experts Killing Our Savings Potential?

If you’ve been following my posts since the summer, you know I’m partway through a yearlong shopping ban, in an attempt to live off less of my income and save more money. The idea was sparked by a conversation with a friend who told me she saved 20% of her income each month and, therefore, felt she could spend the other 80% on whatever she wanted. The comment was one I’d heard and read dozens of times before, yet it took her saying it for me to finally have the aha! moment and ask: do you actually need 80% of your income, or could you live off less and save more?

I don’t blame her for thinking that saving 20% was enough. Heck, I’d thought the same way for an entire year, up until that point. My budgets were literally written around the fact that I would first save 20% of my income and then allocate the other 80% to everything else. Now that I’ve reworked my monthly budget and have seen how much I can actually save each month (a lot more than 20% when I don’t travel), I’ve finally realized something: we’ve been doing it backwards, all this time.

Growing up, I feel like one of the most common phrases I heard was to “save 10%”. I heard it from loved ones, from the media and even from the experts.

Dave Ramsey: Savings = 10%

If you’re in the U.S., you’ve likely heard those words come out of Dave Ramsey’s mouth. In his budget breakdown, he suggests you save 10% of your income. The leftover 33% not allocated below could be split amongst your living expenses, debt repayment and more savings goals… but you’re only told to save 10%, so it’s easy to see why some people might save no more than that, if they followed this.


LearnVest: All Financial Goals = 20%

LearnVest suggests using the 50/30/20 rule. With that, the first 50% of your income goes towards your fixed costs (for me that’s rent, utilities and insurance policies), then 30% covers variable costs (groceries, gas, shopping, etc.) and the final 20% is allocated to all your financial goals (LV says to focus on paying down credit card debt, building an emergency fund and saving for retirement). If I had only allocated 20% of my income to all my financial goals when I was maxed out, I would still be in debt. I don’t like this model, because it literally tells you to spend 80% of your money. Bad advice, friends.

Gail Vaz-Oxlade: Debt Repayment = 15%, Savings = 10%

Gail’s budget breakdown is the closest I would follow (and did for a long time, other than exceeding the debt repayment amount). She suggests spending 35% on housing, 15% on transportation (car payments, insurance and gas), 25% on living expenses (groceries, cable, internet, health/life insurance policies, etc.), then allocating 15% for debt repayment and 10% for savings. If you’re debt-free, take what you would’ve budgeted for debt repayment and allocate the full 25% for savings instead. I would probably suggest this to anyone with debt who was writing a budget for the first time… but I still think we can do better.

What the Experts Don’t Suggest But Should: Living Expenses = 50%

Notice I didn’t mention anything about savings goals? That’s because I think we’ve been doing it backwards, this whole time. What if, instead of telling us how much to save, we grew up hearing how much we should live off of instead? What if your parents had made you save half of every paycheque you earned as a teenager? What if your teacher (of the personal finance class that only exists in my dreams) had told you the goal of budgeting was to live off half of what you earned as an adult? What if the experts said the same thing in all their books, courses, shows, etc.?

Now, please don’t take the title of this post too seriously; it’s meant to be tongue in cheek, to get your attention. I don’t actually believe personal finance experts have hurt our savings potential. Without their advice, I probably wouldn’t be in the habit of saving at all! I just can’t help but wonder how different our financial situations might be if the conversation re: budget breakdowns was turned around right from the start, so we were less focused on all these random categories and just focused on one: live off half. Pete did it and he retired at 30... so what do you think the rest of us could accomplish, if we did the same?

*I also want to add that, since our talk this summer, my friend is now saving 30% of her income. Oh, and she’s not my friend. It’s Baby Sis. At age 20, she’s trying to max out her tax-free savings account and is obsessed with tracking her investments. My mini hero. So proud.

  • I kind of have the same issues with the “experts” suggesting that you should only spend a certain amount on debt and savings. Yes, those baselines are good, but you should always be striving for more! I feel like the guidelines might give people excuses to not save/pay down as much debt as possible.

    Of all of them, I prefer Gail’s model the most, and actually used her budget pie chart in my blog post today. The key is to emphasize that when you are able to decrease your living expenses, you should then reroute that money to other spending opportunities, you should be sending it to debt and/or savings.

  • I’ve always wondered where this magical 10% came from? Surely it is so different for everyone.

    In my opinion, the average earner should be looking at something much higher than this for “savings”. Our current savings rate is over 60% this year and whilst we are fairly frugal and slightly above average income earners, I don’t think that this is ridiculous.

    Its a dangerous game. Experts obviously can’t tell people who are struggling from paycheck to paycheck to save more than 20% of their income. However, by giving these “rules”, I think it probably does encourage many people to save less than they could otherwise.

    • Yea, I know there’s a reason behind these budget breakdowns. It would be hard to tell anyone to save more than 10%, when they were struggling… or even if they were just big spenders. Saving isn’t a habit most people learn until later in life (if at all). That’s why I wonder how different things could be if we were all told to live on the absolute least amount possible as kids/teens! What if our grandparents grew up learning this, and then our parents did too… where would we all be today?

  • When I was in University and working full time in the supper my dad told me to save have of every pay cheque or every second pay to help with expenses during the year. While I haven’t kept this up to date and I did slip when I got my first “real” job, I do save around 30%. This varies between long term, travel, sports related and Christmas/birthdays. Excellent suggestion and I think going forward I will continue to increase it with time.

    • That’s fantastic, L! I’ll save 30% this month, but this always fluctuates depending on how much/how little I travel. Next month, for example, I think I’ll save just 22%… but I’ll be living on 49%! (Lots of travel.) Good luck increasing your savings!

  • I’m currently putting about 33% to debt and saving about 14% for retirement, which means I’m basically living on 50% of my income. I think after debt is gone I can easily shift that money around, but I’d like to loosen up a bit and live on 60%. That’s still a killer savings rate.

    I think the reason the experts state that 10-20% range is really to ensure it includes everyone at all income levels and also at all levels of financial literacy. If I made 25k/year, I’d be very disappointed to feel like I was “failing” because so much of my money was tied up in living expenses that I couldn’t live on only half my income. Also, if I just started learning to save, 10% is way easier of a stepping stone than 50%. That said, it’s necessary to keep learning and pushing past that point – that’s only the entry point I think.

    • That’d be amazing, Alicia! And I know why the experts make these suggestions. But let’s take the experts out of it – that wasn’t the whole point of this post. I honestly wonder how different the entire Western world would be if we’d grown up being told by everyone that we had to live off half our income. Instead, we’re exposed to ads, constantly told to shop and consume, made to feel like we need the newest of everything… and then saving money is just an afterthought. Experts help us turn it around, there’s no doubt about that. I just wonder how much more money we’d have in the bank, if we had been told something different right from the start.

  • I save 10% of my income in an RRSP, have a company DCPP that contributes another 3-4%, and save $90/paycheck in a TFSA (my emergency fund). I think that this is reasonable for my long-term and emergency savings.

    I’m a big fan of GVO too, and I’m reminded of a few episodes of ‘Til Debt Do Us Part where one partner was an excessive saver and wasn’t comfortable spending any money. While personal finances are just that – personal – and everyone needs to find the right mix for themselves, I think that moderation is the key to success is most instances (off the top of my head, diet and finances come to mind!).

    I wouldn’t save 50% of my income, or try to live off of only 50% of it. I think the key that’s missing from your post is that when most experts talk about saving 10% of your income, they’re talking about long-term (i.e. retirement) savings. If you want to ‘save’ money for large purchases like a house, a car, or a vacation – that’s not counted in the 10%. GVO calls those ‘savings’ “planned spending” – it has to come out of another part of your budget.

    • I don’t disagree with anything you’ve just said, and have written countless times before that personal finance is personal. I will always agree with that. This post was meant to be a little more philosophical than logical, in that I’m just trying to turn the conversation around so our focus is on living on less first and then trying to save more money.

      • That’s totally fair, Cait. I think that’s a more productive way to approach money management than many people currently do.

  • I keep meaning to make a graph and do a post on the 10% rule, but basically 10% with reasonable estimates of rates of return, wage increase in early years, etc., gets you to a “typical” replacement of ~50-60% of your income (before gov’t benefits) in retirement at a typical age ~65, if you start saving that 10% in your early 20’s. Plus it’s a nice, round number.

    However, it’s much too low for most people’s real lives: if people aren’t starting to save until their 30’s or 40’s, or want to retire earlier, then you will have to save more. If you don’t start until your mid-30’s you’ll likely have to save more like 20%. If you wait until you’re 50 and your kids are off to university then you have to save so much that you would have to start moving the ~50-60% replacement goalpost or face a silly conclusion like living off of 40% of your income while working so that you can live off 55% of it in retirement.

  • Cait I love this post, I love the idea of starting with what we need and working from there. Saving shouldn’t be an after thought!

    The only thing that doesn’t sit right with me how often % is used to determine how much someone spends or saves. For someone making $40K a year, saving 20% of their take home is pretty huge–and living on only 50% would be a serious challenge. For someone making $100K it would be a lot easier to live on less than 50% and save much more than 20%.

    I think that % based budgets, regardless of which end you start at, can be great guidelines and starting points but ultimately it comes down to salary (and cost of living, dependants, etc).

    • Good points, lady – thanks for adding them! I agree that I couldn’t have lived on 50% of my income when I was making less money. Maybe we could rework that last suggestion so it’s just that we should live on the least amount possible, then save as much as we can. :)

  • I totally agree with you that 10% seems like a strange rule of thumb.

    I currently save nearly 39% of my monthly income towards my emergency fund, RRSP, travel fund, big ticket items and charity. So, some of that money will eventually be spent (travel, big ticket items, and charity) but most of it ends up in long-term savings.

    I think the 10% rule is strange because so much of how much you can save is dependent on what your total salary is. If someone is making minimum wage, they’re going to have a hard time saving 10% if they’re living in a notoriously expensive city like Toronto. But, if someone is making $200,000 annually and they’re only saving 10%, they’re going to be in for a big shock come retirement…

  • This is a very interesting post Cait. 10% should be seen more as a minimum saving rate than as a sufficient amount to save for any income. I tend to forget about my pension when I am reviewing my finances because it is automatically deducted. These deductions amount to almost 10% of my gross pay. I plan to save another 15% from my net pay. I think that is decent compared to my income. However, I know I could do better if I were to make a few changes. Living alone is expensive, I could free up 16% from my housing costs if I rented out my spare room. If my car was paid off (3 years left) I’d free up another 12% of my income. I find myself thinking a lot about my car lately and trying to convince myself that I should keep her as long as possible even though I’d like something new.

    • I was the same way, Trista – didn’t consider how much I was contributing to my pension at all, because it was automatic. Now that I’ve withdrawn it from the pension fund and put it in my own RRSPs, I can finally see that I used to save money. I think it’s great you’re automatically contributing 10% of gross and still want to do more.

      As far as the car, does it actually need to be replaced? Or is it a cosmetic thing? Just want something newer?

      • I’d like something higher off the ground mainly (maybe even AWD). I got stuck in the snow a lot last winter. I actually had to call road side assistance four times. I’d also love heated seats and a remote starter.

  • I like this idea, it’s a sort of ‘challenge’ to change your mindset.

    I work best when I make a goal in mind. Recently I’ve made a net worth goal which REQUIRES that I save a bare minimum of 30% a month to reach my long-term goals (not even including my short-term goals and vacation fund) and it’s definitely spun my head around!

    So right now, I’m ‘living’ off 50-60% of my income depending on my short-term goals and it’s challenging. It’s also making me glad I bought most of my Christmas presents early XD

  • DH and I now live on 50% of our incomes and save/invest the remainder. When I was paying off debt, at one point I was paying 50% of my after tax income to debt and the habit stuck afterwards. I started this later in life than I wished I had but our end results will still significant than if I had never decided to change my perspective on living and consuming.

    • I used to do the same re: debt, but it didn’t stick with savings. That said, back then living off 50% of my income was intense – the tightest budget I’d ever want to be on. But now that I make more, it’s easier.

  • Yeah the 10% rule of thumb seems really arbitrary. I know that I’m pretty aggressive about saving/investing BUT at the same time, I’m not about to sit around like a little hermit all in the name of saving a buck. I make a point of keeping my lifestyle spending in check and have made some short term sacrifices in order to meet my long term goals. That said, I’m sure these guidelines are very helpful to the general public who aren’t PF nerds like we all are ;)

    • Absolutely, Charlotte – I totally agree with that. I just wonder how different everyone (not just as PF nerds) might be, if we’d grown up never hearing anything about savings percentages to target, but instead hearing we had to live off 50% of our income.

  • Agree (to the best of my abilities, I am not actually capable of “saving the rest” haha)

    I’ve never been ok with the “save 10%” rule. I’ve always saved more.. even at my current income 10% wouldn’t be substantial.

    I personally get nervous if I’m saving less than $600-$700/mo. I don’t know why… maybe because it takes that amount to put $400 in your TFSA and $300 in your RRSP which is just enough to make me feel like I’m not failing at life. When I had more, I saved more: more into the registered accounts and additional funds directed to things like vacation fund, etc.

    Saving 10% is stupid, it’s not good enough for anything. I try to stay at 35%. I have never tried to save 50%, but my fiance and I are talking about living off of one salary… why not? Just think of the financial freedom that would come from banking one persons entire pay.

    Maybe 10% is good when you’re getting started and you don’t know how to save… but god it’s not enough if you actually want to DO anything with your money.

    • I’m not saving 50% (“the rest”) right now either, because of travel. But I am living on 50-55%, which feels good.

  • These days, with both of us retired and on fixed incomes (OAS, CPP, pensions and dividends), most of our expenses are also pretty fixed with the exception of a few variable spending categories (food, clothing, house expenses and miscellaneous spending). Thus, because we have worked with a pretty fixed budget over the years, taking into account manageable price inflation), our savings each month is pretty predictable. Some months it’s higher while at other times it’s lower (especially around family b/days and holidays). The important thing for us though is that we still consistently save a sum of money each month.

    Of course, back in the day when we were quite young, newly married, both working and planning on raising a family, saving money was a tad more complex and tougher. Regardless whether the savings goal was 10-20-30 or more %, the thing that we always kept uppermost in our minds was the reason for saving: what were we eventually going to do with this money, and how long would we have to save how much in order to meet our goals (egs., new house down payment, new car, vacation, clothes, whatever). Every buck that we managed to save (and/or earn through investing) had to have a future purpose attached to it to some extent. That in itself helped us a lot to sacrifice so as to eventually meet those goals – and we made sure that they were “stretch” goals. As in business, we planned the financial journey and then worked the plan.

    • It’s fantastic you’re still saving, Rob! Good lesson for the younger generations: you shouldn’t stop saving just because you’re retired.

      Also, I think you and your wife should write a book about marriage + money. :P But seriously, I love reading your stories about how you made decisions, set goals, the mindsets you were in, etc. It’s inspiring!

  • Eventually my goal is to get my savings up to more than what it is now. Most of my extra income goes towards student loan repayment. I recently started putting my vacation pay in a separate savings account. I was just using it as extra money but if I want to take some time off (even if I’m not going anywhere) it’ll be nice to have that money.

    • That’s fantastic though, Nadia – that you’re throwing everything extra at debt! I can’t remember if you’ve mentioned it, but do you have a debt-free date?

  • I’m with you, Cait! My goal when I started working fulltime was to save 50% of my monthly income and 100% of my bonuses. I’ve improved on that since then and I think I should be down to living off of 20% of my income once my mortgage is paid off, in 2016. I should be able to retire in my early thirties. Yes, I make good money, but I watch my friends buying $60,000 cars and houses over $1M and spending $50,000+ on their weddings and I know I’m one of the few people saving this much. Living off of 50% isn’t depriving myself at all – we really don’t need a lot to enjoy life. Just some good friends and family and life is pretty awesome!

    • Dang! That’s amazing, Leigh. And I’m with you re: watching everyone spend money on things that you wouldn’t spend money on. I try to remember that we all value different things, and at different times. I know I don’t want a wedding, let alone a $50,000 one, but if that makes my friends happy then power to them. That’s their decision to make. I’ll keep my money in the bank. :)

  • That is interesting to think about. I personally love the fact that I see so many bloggers challenging that, and saving 60%+. My mentality has always been to save as much as I possibly can, and reduce my expenses as much as I (reasonably) can. I never set out to save a set %. I do agree with those saying income is a factor, though. I’ve never made a large amount, so living off of 50% can be difficult, but I agree that having 10-20% ingrained in your mind can be limiting!

  • I think the experts are catering to generalities, but I think most people can save more. I am putting almost 50% of my money to debt, so I know I can save that amount once I’m debt free. And I can’t wait! I think we should start encouraging people to save more!

  • I love watching reruns of Gail on “‘Til Debt Do Us Part”!

    Have you listened to or read Clark Howard at all? Like Dave Ramsey, he’s also US-based but takes a more individualized approach to saving. (“You’re maxing out your retirement accounts? What about credit card debt? What’s your mortgage balance? Have you looked into doing a Roth account?”) And in some cases, with ultra savers who call him looking for advice on how to invest a huge surplus of cash flow each month, he’ll encourage them to spend a little money on a vacation or fun as a family.

    • I know who he is and know his producer, but haven’t really listened to his show… sounds like I should!

  • It irks me to no end when I read about only saving 10% or so–makes no sense to me! Save as much as you can to enable a life of freedom! But of course that’s just my opinion :). We save 65%-85% of our income every month, which is a comfortable level for us. We don’t feel deprived, but we don’t really have any fat to trim either.

  • I’m in the mantra is any savings plan being executed is a good savings plan, I think most people get scared away or very skeptical with saving 50%, I can hear them saying but how will I pay for my house, car, cell phone, food, vacations, etc. Not saying this is right, but a step in the right direction saving 10% is better than the fear and not saving at all.

    I’m really curious what are grandparents saved before credit cards and student loans, etc. I bet 50% was the norm, just like you mentioned.

  • This is what I’m writing about next! I grew up hearing 10%, then I learned to limit my living expenses to 25% from Gail Vaz-Oxlade.

    Right now we live off about half of our single income. It has opened up so many possibilities.

  • Thanks for this post! I think my “set it and forget it” savings/investing plan has made me complacent in recent months. I’m inspired by your shopping ban to try and do better!

  • I remember in highschool having a friend who started working before all of us and she’d be so proud that she would save 15% of her income each paycheque. But then she would spend the rest, even though she was still living at home and had no real expenses. I think she was told to save that amount from her parents, and they probably read that in some finance book. I’ve always tried to save 50% of my income. Of course some of that savings goes towards travel and shopping eventually, but I always try to keep my life expenses to half of my income.

  • I’ve never been clear on whether the “experts” mean to save 20 percent of gross or of net income. We are in the 46 percent tax bracket so without accounting for property taxes and sales taxes and so on, we are already losing almost half of our income. So, if I save 20 percent of my gross, I am actually living on only 34 percent of my income. I can’t do that.

  • Nice post Cait. I hope to write a follow-up to this on my site in the coming weeks.

    I totally agree with what you said, and can you imagine how well off many young adults would be today if they lived on half of what they make?

    I know I’d be MUCH better off :)

    Keep up the great work growing the brand.

  • Love it! You’re right that the “expert version” focuses on maximizing spending (and thus naturally limiting saving.) Retailers further this unhelpful way of thinking by helping us figure out how much ____ (car, boat, house, debt) we can “afford.” Ugh.

    If we instead start with the thought of trying to reign in spending we can naturally save comfortably to higher and higher levels.

  • Cait, if your goal was to get people thinking, challenging conventional wisdom, and start a wide ranging discussion… wow, resounding success! Terrific article!

    Here’s my take (and what I teach). Your financial life is divided up into three phases – red, yellow and green, like a traffic light – with separate spending/savings goals in each phase.

    You start out in the red phase, and you stay there until you’ve met two criteria: eliminate all non-mortgage debt (including credit cards, student loans, car loans, all that!), and fully funded a healthy emergency fund. The red phase is a full-on, four-alarm financial emergency! So you live on the lowest absolute amount you can, without sacrificing health or safety. It’s not expressed as a % of income, because it has nothing to do with income. It’s NO fun at all – and it’s not supposed to be. Your goal is to get out of this phase ASAP – so you throw every single penny you can scrape up towards debt elimination and emergency fund building, because that’s your only ticket out!

    THEN, you can exhale and graduate to the yellow phase. This is where your savings go into long term investment, fully utilizing whatever tax advantaged accounts are appropriate to your situation. Here, you’ve got much more latitude – it depends on how fast you want to reach full financial independence. In a big hurry to get there? Dedicate 40%, or 50% – or more! – of your gross income. Tired of the ultra-frugal red phase lifestyle, and willing to wait a while longer for full financial freedom? That’s your prerogative, which you’ve earned by meeting the red phase goals. So slow it down to 30% or less if you want. (Do the math though – unless you’re in your low or mid 20s, it better be at least 20%.)

    Once you’ve socked away enough? Congrats, you’ve reached the green phase! No savings goals here, just a speed limit on spending.

    Red/yellow/green emphasizes voluntarily making sacrifices early in your financial life, when it’s (relatively) easier – so you aren’t FORCED to make even bigger sacrifices, INvoluntarily, later – when it’s often considerably more difficult

  • I am shocked that they all are so low. I knew it, but had not seen it all compiled in one place. If Dave Ramsey is all about paying cash, what are you supposed to spend all your money on if not saving for retirement? I don’t think I could go out and spend that much of my paycheck anymore.

  • My husband and I lived on 50% or less of our income, and used the rest for long-term savings/investing – and paying off our mortgage in under 5 years. The freedom you get from living on less can’t be over-stated. If you need every penny that you’re bringing in, you may find yourself trapped in a job you hate, just because it pays the bills.

    That said – I think most of these experts were saying put AT LEAST 10% into savings, they weren’t recommending that you never save more than that.

  • The real underlying problem is the focus people have on what they are “giving up” as opposed to what they are gaining. Money and what we buy with it feels more tangible than something called “freedom”.

    Food for thought: according to the book “Happy Money” housing and transportation do little to nothing to increase a person’s baseline happiness, yet the experts allocate 35-50% of a budget on these life items. That sounds like a rotten ROI!

    And what brings the most stress to our lives (again according to “Happy Money”)? Working, commuting and shopping, two of which are often considered necessary activities to pay for the housing and the car(s)…hmmm.

  • Loving your insight! Living on 50% of your income should be on everyone’s goal.

    10% saving is OK if your rate on return is very high. If you live on 50% of your income it will certainly allow greater margin of errors when it comes to market volatility and noise.

    • How can someone in a 40 percent tax bracket save 50 percent of their gross income? Someone earning 100,000 would have to live on 10K. Or if it is aftertax – 100K minus 40K equals 60K. Live on 30K, save 30K? In any city, you could not even pay rent and buy groceries on that sum. This is a nonsensical suggestion for anyone who has a family, is not upper income and who lives anywhere near an urban centre.

      • Oh Al, it’s done all the time! We live in a city, have a family, are not considered upper income in the US and could easily live on 30K! Of course our house is paid off but that’s because we saved a good size percentage to throw at the principle of the mortgage every month! That’s saving too– net worth goes up.

        As it was our house payment was under $400 a month anyway so even with the mortgage we could live on 30K.

        You’re too negative. We all have MUCH more potential than we give ourselves credit for. It’s a good chance that if you were go through your budget, at least half the stuff where you say, “Well, I HAVE to have that,” it is actually very trimmable. You just have to not be so negative and automatically shut out possibilities like: Share housing, buy a duplex and rent out the other half or (our way) lowball offer a bank to buy a fixer-upper repo.

        You also don’t need that car, your cable or land line, new clothes every season, half of those groceries, etc. It’s all much more negotiable than you would think.

        Sounds harsh but it’s good for ya’. I promise. Sometimes we need to reset our perceptions. In many countries the people live on just a few dollars a day. I think 30K sounds pretty extravagant myself.

        • I agree that there are many things to cut back, but life in Canada and life in the United States are very very different in terms of real estate prices. Using the Toronto area as an example, which is our largest city and home to almost a 10th of our entire population, the average price for a detached house is about $600,000 and approaches a million dollars in a good area. A semi detached home or duplex in a decent area will run you $450,000, in a good area it will be about $750,000 and up. These are 1000 square foot houses – not luxurious. The situation is even worse in Vancouver and almost as bad in Montreal, our other two largest cities. It is not reasonable to suggest that the solution is moving outside the urban areas, because the cities and larger suburbs are where the jobs are. So no-one is going to get any house, or any apartment anywhere, even in the worst areas, for a monthly rate of $400 a month, as you did. In addition, our tax rates municipally, provincially and federally are massively higher than those in the US, and our mortgages are not tax deductible. The only advantage that we have is that we don’t have to spend anything on health insurance, which I know is a major cost for Americans. So, with the average family spending about 30 to 35% of their incomes on housing costs – and that is on average houses, not McMansions – the saving rates you suggest are simply impossible.

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