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Gallup’s annual “Mood of the Nation” poll sampled 1,018 adults from across the United States earlier this year, and the results show that more Americans say they are worse off financially right now than they were a year ago. 42 percent of the respondents consider themselves to be worse off, 35 percent say they are better off, and 22 percent claim to be in the same financial position.

This sentiment is surprising considering the economy has been continuing to improve and the stock market (measured by the Dow Jones Industrial Average) was up 26.5 percent in 2013, the biggest annual increase in 18 years. Also, the official unemployment rate for December 2013 was 6.7 percent, the lowest rate of unemployment since October 2008, the last month before the economy began seeing the effects of the Great Recession.

Why are people feeling less financially secure about their current situation while the economy, as a whole, has been improving?

Averages don’t tell a complete story.

First, it’s clear that averages don’t apply to everyone. You can’t predict with precision any particular woman’s height when you observe that on average, women in the United States are 5 feet, 4 inches. Americans are in a better financial situation overall, but that doesn’t mean than any particular household is thriving more than last year.

But a survey of a representative sample should show that there is a positive trend.

Self-reporting and questions about feelings are not very accurate.

When the economy is improving but people’s financial lives aren’t, it doesn’t have much to do with averages. If the survey looked at people’s bank accounts and credit card statements, the results would undoubtedly be different than the Gallup poll’s results. This poll is asking people to make a judgment call. It’s a survey that asks about feelings, not about a financial reality. People don’t always know how to accurately report their financial situation.

That doesn’t mean that the survey has little value. Feelings about one’s financial situation are important, because it’s those feelings — not “reality” — that determine the choices people make about the future. It’s possible to have more money in the bank and less credit card debt this year than one had last year, but feel worse about the financial situation.

More knowledge results in more concern.

If you were blissfully unaware of the danger you were in financially last year, and at some point discovered the truth about your financial situation, it’s possible you’re more stressed this year than you were last year about money, despite being in a better position. My concern about my finances increased when I stopped ignoring my bills. The year I began keeping track of my finances, I might have reported feeling worse off financially than I felt the previous year, despite the truth that I was on the road to financial improvement.

Your friends appear to have improved.

One way people determine whether they’re better or worse off financially is by comparing their financial situation with the perception they have of their friends’ financial situations. Studies have shown that income satisfaction isn’t necessarily correlated to certain amounts of income, but the differential in income between a person and his or her friends and colleagues. In other words, a $50,000 income is satisfactory if your friends earn $40,000, but it’s not satisfactory if your friends earn $75,000.

This comparison plays a role in how you judge your financial situation. If your friends appear to have had a much more successful year than you have, you might be inclined to believe and report that you’re worse off financially now than you were the prior year.

And here’s the kicker. Your friends really are richer than you. A new research paper published this year uses the “friendship paradox” to illustrate this. The friendship paradox describes how your friends are more popular than you, because people who have more friends are more likely to also be friends with you. This is described in Slate:

People who have a ton of friends are more likely to be your friend in the first place. They have a greater tendency to make friends. People with a lot of friends drive the average number of friends up in tons of other people’s social networks because they are connected to so many other social networks…

It’s similar to going to the gym and feeling like the most out of shape person there. The reason that everyone around you is so in shape is because they’re at the gym all the time—that’s why you’re seeing them. Everyone else is at home relaxing and not getting in shape. You’re looking at a very biased sample of people.

When we compare the finances of our friends, we’re also looking at a biased sample of people. And when you see the wealth of your friends (and its growth over the past year) outshine your own, you’re more likely to feel bad about your financial situation and report that negative feeling in a survey.

The media affects your perception.

I saw The Wolf of Wall Street in a movie theater a few weeks ago. The film focused on a stock broker who committed crimes, stole investors’ money, lived a lavish lifestyle, and didn’t really get in that much trouble for his misdeeds. Much of the movie focused on his lavish lifestyle without too much criticism. Some will see the film as a glamorization of a lifestyle of excess, some will see it a a condemnation, but I think it was more successful as the former.

For all the criticism of the “one percent” in American culture over the past few years, we are still fascinated by the lifestyles of the rich and famous, as we see through films and television. While more of the middle class struggles, the more we look to the media to help us escape through fantasies about the financial life that will almost always be out of reach. More programs prey on the public’s desire to see stories about rich people, whether they’re stories of success or failure.

Either way, the proliferation of showcases of wealth in the media has an effect on the way we view our own lives, and this might also play a role in our perception of financial progress. That is, the more we see people flaunt their wealth in the media, the worse we feel about ourselves.

Do you feel worse off financially now than last year?

Here’s the question the Gallup organization asked in its survey:

Next, we are interested in how people’s financial situation might have changed. Would you say that you are financially better off now than you were a year ago, or are you financially worse off now?

I am financially worse off now. Technically, that may not be the case. I just paid a large tax bill, and my January balance sheet suffered because of that. But this is a tax bill I knew — or should have known — was coming, so my wealth hasn’t really changed. In fact, I’ve earned more income than I’ve spent over the last year, so my financially situation should have improved.

How would you answer this question?

Photo: Flickr/Gamma Man

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I’m a reluctant entrepreneur, but I’ve learned to be less self-conscious about the fact that this is the designation society has given to me as someone who started his own business. While many people after, but also before, the recession have started side businesses to improve their financial security, for me, a hobby turned into a profitable and enjoyable way to spend my time.

But entrepreneur was always a dirty word to me, even after I came to the realization that I was, in fact, an entrepreneur. The word hustle is now associated with side businesses, but a hustle is a con, a scam. These words have always had the connotation of being less than forthright in business, using deceptive practices to get a customer or mark to part with his or her hard-earned money.

Entrepreneurship has a rich history in the United States, considering this is a country of immigrants, and every batch of latest immigrants has a hard time finding acceptance in traditional jobs, and language and cultural barriers often keep communities looking within for business.

Self-employment as a result of side businesses is a growing trend, but not necessarily due to immigration. This is the focus of Kimberly Palmer’s new book, The Economy of You: Discover Your Inner Entrepreneur and Recession-Proof Your Life. Kimberly is the money editor and Alpha Consumer blogger for U.S. News & World Report, and I’ve had the great pleasure of working and speaking with her over the past few years. She joined me recently to discuss the theme of her latest book.

Continue reading this article to listen to the audio or to find a link to download the audio for later. You can also subscribe to the podcast in iTunes. Visit Kimberly’s website at ByKimberlyPalmer.com.

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New Year’s resolutions have become so cliché that the process of making them has become a joke. People settle for mundane goals for the year like “losing weight,” “quitting smoking,” and “getting out of debt.” These are great goals, of course, but most who think about these only when the calendar changes soon forget their plans, continue their lives as before, and lament their failure when they reflect as next year approaches.

Part of the problem is that these goals are not specific enough for anyone to take seriously. Gurus and bloggers are pushing forward the idea that goals need to be “SMART” — specific, measurable, achievable, relevant, and time-based — as if it’s a new concept. This is a helpful way to look at your resolutions if you want to approach your life as a project manager. A better approach is to realize that time moves very fast, and with busy lives it’s better to make modest goals and focus on each small step that moves you in the right direction.

New year hatThe most popular New Year’s resolutions are tiresome. It’s no wonder people don’t keep them. Few people can be passionate about losing weight or getting out of debt, and even if they are, it will take a lot of work to change the behaviors (or medical conditions) that caused the circumstances needing improvement. These can be multi-year goals, and if your entire success relies on completion within 365 days (366 in a leap year) you’re setting yourself up for failure.

Here are some different ways at looking at financial resolutions that are not only achievable within the year but are more interesting than what many may typically resolve to do. While there are twelve listed here, you’re more likely suited for success if you focus on just one. The year will be over before you know it, but your resolutions should always be aligned with long-term goals for yourself or your personal mission statement.

1. Spend money on things that are important.

Your spending habits reveal what is important to you. If you spend more money buying video games for yourself than you spend on activities with your significant other, you have decided on some level that you favor your time with a computer game more than the one you love. The higher value each dollar has to you, with the importance of one dollar related to your level of disposable income, the bigger the importance of whatever you choose to spend that dollar on.

Look where your money goes. You may need to track your spending if you’re not sure. You’ve defined what’s important to you by your expenses. Your shelter (rent or mortgage) and food are obviously important and form the basis of your expenses, but beyond that, you can rate how important any activity is to you by comparing your level of spending. If you don’t like what you see, resolve to spend your extra money — after you cover necessary expenses and saving — on the things you want to be important to you.

2. Create something every month.

FoodThe culture in this country is one of consumption. We consume food, media, and resources. In order to consume, we spend money. This year, change your role in society. Become a creator rather than just a consumer. You can create something that other people consume or something that you consume yourself.

  • Cook more often than you prepare frozen meals and dine out.
  • Create your own adventures instead of watching movies and television.
  • Write in a journal rather than reading a best-selling novel.
  • Engage your mind creatively, taking photographs, making art, or performing music.

3. Learn a new skill.

This could be the year you focus on trying new things. The best new skills to learn would be those that are related to your interests and passions. Here are a few examples, but think about the things that make you happy and decide on a skill that enhances your attitude.

  • If you’ve had a favorite vacation destination in mind in a foreign country, start learning the language and culture.
  • If you like running but haven’t taken this type of exercise seriously yet, train yourself for a 5K race.
  • Learn how to play the piano.

Many new skills can take more than a year to learn. Don’t consider your year a failure if you don’t complete your mission to learn something new. Keep taking small steps that move your life in the right direction, and whether you complete your goal within one year is less important.

4. Earn money from your hobby.

Coin CollectionConsumerism Commentary started as a hobby, but after a while, it became apparent that writing could also be a business that generated income. In some cases, though, turning a hobby into a business can turn an enjoyable activity into a chore. Turning your hobby into a business is not the best option for everyone, so this has to be a personal decision. If you like collecting coins, do you want to be a coin dealer? If you’re particularly skilled at photography, do you want to market yourself and compete with professional photographers?

Not everyone wants to start a business, but keeping your activities small can keep the business aspect of your hobby to a minimum. Strike the right balance between hobby and business so you still gain a maximum amount of pleasure and satisfaction from the activities you enjoy.

5. Start a blog to track your finances.

I have first-hand experience about how helpful it has been to publicly track my own finances. This is a great way to maintain focus on any goal. By making your progress public, you are holding yourself accountable for your success. And if your goals are interesting to others, even strangers, they can join you in your quest and offer support — and more often, criticism — when you need it. Draw some inspiration from Naked With Cash as well as how I tracked my finances from 2003 through 2011.

Rather than using a blog to track your success, allow the blog to be your success. Start a website using WordPress or Tumblr and write anonymously about the financial issues in your life. You don’t need to be a great writer, but if you continue, your writing will improve. Don’t be concerned about building an audience or earning money. Writing for its own sake helps clarify financial issues, particularly when you read what you’ve written over a period of time.

Tracking your finances in software like Mint.com or Quicken isn’t always enough. When you look at your finances with the intent of writing about them, your brain performs at least a minimum amount of analysis, and this is a step further than most people take with their finances.

6. Support local businesses.

The 3/50 Project is an initiative that encourages consumers to spend $50 among three local businesses each month. Keeping your money local helps improve the economy in the community where you live, and it helps you build relationships with your neighbors near you and across your town. Similarly, as much as I don’t like the real motivation behind American Express’s Small Business Saturday, many mom-and-pop business do in fact see benefits to encouraging AmEx customers to enter their stores.

Following an initiative can provide extra motivation for achieving a goal, but you can do this without an initiative as well. Supporting local businesses is a possible resolution that most people don’t consider. Usually, people resolve to save money, and that could mean shopping online or visiting big-box or warehouse stores. Spending money in these locations does not help a community thrive — at least, not directly.

The same is true about local community banks and credit unions. By moving your money away from big banks, you are taking a financial action that is more beneficial in the area where you live. This is a simple, achievable resolution for the new year.

7. Sell or give away your stuff.

ClothingThis could be the year you focus on decluttering your life. When I moved into my current apartment a few years ago, I seemed to have so much space available. I fell into the typical habit of expanding the way I live to fit into my new environment. If you look around your living space, you can probably find a number of things you don’t need. Here are just a few suggestions of where to start:

  • Look through your closet and give away the clothes you no longer wear.
  • Sell your old games, electronics, movies, and books on eBay or Amazon.com.
  • Organize your papers and shred old documents you no longer need to keep.

This sounds like a good weekend project rather than a New Year’s resolution, so to make this worthwhile, consider running through this process on the first Sunday of each month. Each time, you’ll find more to eliminate. If unchecked, “stuff” can take over your life. If you have so much it’s burdensome, your possessions can own you rather than the other way around. Reduce and eliminate your dependency on things that take up space.

8. Spend more time with activities that make you happy.

I mentioned above that you can determine what’s most important to you by following the money. The same thing is true about time. If you were to analyze every waking minute of my day, you’d see that I spend most of my time working on my business and most of the rest of that time with my girlfriend. Or that’s what I’d like to believe. I, for one, spend a good portion of time entertaining myself with movies and television. Productivity nerds would fairly criticize me, but I do find value in resting my brain by allowing a local grumpy doctor solve medical mysteries so I don’t need to or by watching a clever con game unfold.

But buy spending my time this way, I’ve traded my enjoyment in creativity, like photography and music, for sitting in front of a television. Decide what’s important to you and schedule time to dedicate to those activities. I’m not a fan of keeping a schedule, but when you can schedule activities you enjoy rather than scheduling corporate meetings, you will end the year happier and more fulfilled.

And the reason we make resolutions at all is because we are unhappy with something in our lives. If we can spend more time on enjoyable activities, we won’t be nearly as unhappy.

9. Volunteer with an organization that matches your values.

Until the government decides to offer a tax deduction for volunteer work, this potential resolution won’t have a direct effect on your finances, but it could inspire you in ways that do affect your money. The first step is creating a mission statement for your life. In fact, defining your mission can be a complete resolution itself for the year, as defining a meaningful mission requires thoughtful self-reflection that goes beyond the confines of a lunch break at work.

Once you have an accounting of your values and life goals, it’s easier to determine what organizations share your view of the world. Spending time with these organizations and the people who share your philosophies can be rewarding. Often, the reward is through personal satisfaction and pride but there can be a financial aspect, as well. You may decide that you want to use your wealth to improve life for a community, or you may decide that you would like to motivate yourself harder to build your own wealth to help you complete your life’s mission.

10. Be happy with what you have.

The drive to want more for ourselves creates motivation to move forward, to earn more money, and to improve our financial habits. When there’s a mission behind this drive, a purpose in life, it makes that motivation more meaningful. Your should also stop wanting for a moment to consider that if you are reading this article, you were most likely lucky to be born in a situation or community where wealth-building, education, and even sanitation are possible. The “pursuit of happiness,” along with life and liberty, concerned the founders of the United States, but happiness is easily within reach.

Resolve to consider all the positive things in your life: your family, your wealth (no matter how bad your financial situation is, it could be worse), your friends. Consider the opportunities you’ve been given that helped you achieve what you have so far as well as the work you’ve put into shaping your life.

11. Don’t settle for low-quality relationships.

Unfortunately, there are often people in your life who bring you down. You don’t want to surround yourself with yes men, but if you look at your extended circle of friends, chances are you have a few with whom spending time makes you feel good and a few who often dampen your mood. While you don’t want to eliminate relationships with people from whom you can receive kind criticism, it is beneficial to reduce time with people who consistently have a negative attitude.

I’ve discovered this over a long period of time. I’ve always held onto friendships, regardless of the quality, because I believed that every close connection was as important as another. Perhaps I grew up, or perhaps I just had less time to spend with people. Perhaps there have been a few events where I had placed faith in a friend and had been disappointed, and another friend advised me I shouldn’t have such “high” expectations for my relationships. There are enough great people in the world not to have to settle for mediocre people in your life. If you feel you are consistently lowering your expectations, it may be time to spend time with others — as long as you are doing as much as possible to be a good person, yourself, in your inter-personal relationships.

This is the age of Facebook. People brag about how many “friends” they have, and it’s more of a thrill of collection than an enjoyment of real connections. Resolve to enhance the quality of your relationships rather than quantity. Although this goes against most “networking” advice for professionals who want to advance their career, it’s an approach for people who want to advance their life.

12. Let go of your grudges.

Just like it will benefit you to reduce your exposure to people with negative attitudes, consider expelling the negative feelings you’re harboring towards others. I don’t believe that positivity in itself brings about wealth — you can’t increase your bank account by just thinking about how nice it would be to have a bigger bank account, regardless of what New Age aficionados tell you — but letting go of thoughts that prevent you from accepting opportunities and greeting the world optimistically will help put you in a better position to take advantage of good things that come your way.

The above resolutions are not specific. You can use them — or better, just one or two — to guide your thoughts and attitude for the coming year, or you can use them to create a basis for measurable targets that come December 31 you can say you reached. Some tie directly into your finances, and others are related laterally. All of them can help you go beyond the typical neglected resolutions like “losing weight” and “saving money.”

Do something worthwhile and meaningful with your self this coming year..

Photos: L. Marie, Ancient Art, LizMarie_AK

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The retail industry has everyone fooled. While millions of people spend their time scouring for deals, clipping coupons from the newspaper if they’re old-fashioned, plugging into the latest mobile deal applications if they are somewhat more technologically inclined, sharing their finds on Facebook to recruit friends for group deals, the companies on the other side of the transaction are generating higher profits.

Can anyone really complain? Consumers are saving more money than ever and yet retailers are raking in more revenue. Even as we’re still trying to recover from the employment effects of the recession and economists say the middle class doesn’t have enough to spend to stimulate the economy on their own, the industry is thriving. It’s a couple weeks early, but I bet the National Retail Federation, when the organization releases its holiday predictions, will expect double-digit growth over last year. The NRF tends to be very optimistic heading into the holiday season, but they haven’t misplaced their trust in the capacity of consumers to spend.

CouponsIt seems like this should be impossible: how can consumers be saving more while retailers bring in more revenue? Well, there are two important assumptions to overcome.

1. Saving more is not the same thing as spending less. Retailers will continue offering sales, deals, and coupons because they simply encourage consumers to spend more. A perceived deal can help convince a spender to open his wallet or swipe her credit card when they might not have otherwise. This isn’t the result only on the large scale, it’s proven behavioral finance that holds true on an individual basis.

A recent study found that digital coupon users spend 23 percent more per shopping trip than those without coupons. If you use coupons, you spend more, not less. You are not saving money. It’s true you’re getting more for the money you are spending — but research clearly shows that you wouldn’t be spending that money in the first place without the coupons.

The only way to save money is to spend less, and the use of coupons is not the path towards spending less.

2. It’s a zero-sum game. Economists talk about the growth of wealth not being zero-sum; this is, a group of individuals who experience wealth growth — say “the 1 percent” — doesn’t require an offset group of individuals whose wealth decreases — say “the 99 percent.” The economy can grow and, in theory, lift everyone who plays a part in it.

Another way of illustrating the lack of the zero-sum game in the economy is by talking about wealth re-distribution upwards. Consumerism is how money from the middle class and lower goes through a process that benefits the corporate class — the executives in large corporations, private equity firms, and preferred shareholders. If the transaction is reduced to its basic components, it looks like money is simply moving from consumers to producers, building more wealth for one group of society while keeping a larger group financially dependent.

Economists agree the process is more complex than this, and as producers show their relevance to society, they create enough economic substance, adding to the full “pie” to match or exceed the wealth that flows in their direction.

But on an individual level, the macroeconomic reality isn’t relevant. When you spend money, you have less. What you spend as a consumer doesn’t come back to you in the form of greater potential for building wealth. Every purchase eats into your wealth. The more you spend on movies and concerts, the less you’ll have available for food and rent.

With the understanding of the above, you’re better poised to make decisions that help you actually spend less rather than just “saving money.”

1. Shop less often. I could buy some new items every time I go shopping for clothing. A few weeks ago, I found myself at an outlet center near the New Jersey shore, and it’s hard to resist some of the nice clothes I can find on sale. (I like Van Heusen’s styles — looks great, fits well, and not as expensive as the premium brands.) I’m tempted to buy something every time I’m shopping, which is completely unnecessary. If I just don’t go, I wouldn’t buy anything.

Even necessities like food — change your shopping schedule and you’ll find your purchases are more efficient.

2. Conserve what you have. A corollary to the above is that you can make what you already own last longer. In terms of clothing, I still had a lot of my clothing from college — and even some tee-shirts from high school. I was probably thirty-five years old when I finally went through and eliminated some of the stuff I didn’t want to or could no longer wear. But because for many years I had no extra money to spend, I simply made do with what I had. It wasn’t until I had some extra income that I decided it was time to upgrade my wardrobe — although it helped that I wasn’t going into an office every day.

3. Buy in bulk. From a behavioral finance perspective, there is one trick that does work to spend less money over the long term, and that’s buying in bulk. There’s a trade-off. You need to store what you buy, and having more stuff takes up extra space, requiring a larger living space than you might otherwise need. And there’s an up-front cost. You’re spending more money today than you normally would, and it’s reducing your cost in the future. A lot of people living paycheck-to-paycheck can’t necessarily handle larger up-front expenses.

4. Reconsider your needs and wants. Many times we’re spending more than we need to spend because we haven’t given a lot of thought to whether a purchase is necessary. There are certainly instances when it’s acceptable to spend money to satisfy a desire rather than a necessity, but it shouldn’t be an automatic behavior. Take some time. Add a delay into the process. Wait twenty-four hours if you find yourself with the urge to make an impulsive decision. This provides an opportunity to consider your other options or how that money could be otherwise utilized.

5. Don’t join rewards or loyalty programs. Van Heusen, the clothing brand I mentioned above, offers rewards. In fact, I just received a $20 discount on my next purchase via email. But I have to make that purchase before a certain date or that money disappears. I can get a decent shirt for $20. It’s worth it. But if I shop, I’ll probably spend more than $20. In fact, just going to the store increases the chances of spending more money that’s not necessary.

I also use the rewards program at Staples. I’ve spent quite a lot of money at that store over the years, and I don’t think I’ve ever received any cash back rewards. I could save money on each purchase by shopping for supplies elsewhere. Loyalty programs incentive shoppers for changing the way they make purchasing decisions, and taking some important factors, like price, out of the equation, it can have an erosive effect on long-term wealth building.

It’s tempting for any particular person to believe that they are better than the average: Overall, people who use coupons end up spending more money, but I’m the exception. Well, that’s always a possibility, just as it’s possible that you’re an above-average driver, but it’s not likely, just as studies show that more than half of the population believes they’re better drivers than average. This is the illusory superiority cognitive bias.

Ditch the coupons and stop wasting your time on efforts that don’t actually save money. Consider your choices and make decisions about your shopping behavior while keeping in mind the tools and techniques that do improve your financial situation over the long term.

Photo: Flickr/StockMonkeys.com

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Subscription Culture: You No Longer Own Anything

by Luke Landes
Dollar sign

Most financial experts agree that if you need a car, buying is almost always a better financial decision than leasing. Even if you have to borrow money for the purchase, traditional financing is a better option than making payments for a couple of years and having nothing to show for it unless you’re willing to ... Continue reading this article…

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The Great Gatsby Backlash

by Luke Landes
Art Deco

I’m looking forward to seeing Baz Luhrmann’s new film treatment of The Great Gatsby. The book, of course, is a seminal piece of American literature, and the new movie is yet another in a long line of interpretations. I like the director’s previous works, and I expect I’ll enjoy the new film. I read The ... Continue reading this article…

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Three Psychological Barriers: Taking the First Step

by Luke Landes
Psychological barriers

Everyone starts their path to financial independence from a different position. The popular belief that everyone born in this country has an equal opportunity for financial success is a Utopian myth. It may be an ideal foremost in early European settlers’ minds as they escaped a society where wealth was determined by little more than ... Continue reading this article…

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What To Do If You’ve Donated to a Fraudulent Charity

by Luke Landes
Charity scam and fraud

It happened after September 11, Katrina, Sandy, the Boston Marathon, and other disasters, man-made and natural, around the world. After serious tragedies, when a compassionate public is at its most vulnerable, unscrupulous individuals find taking advantage the world’s generosity comes easy. Within hours — even minutes — of the news, new operations spring up, offering ... Continue reading this article…

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