Guide to Money Management

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Contents

The Complete Guide to Money Management For Beginners

Managing your money effectively comes with an endless list of benefits, including staying on top of your bills and making decent savings. These savings will come handy in settling debts, preparing for pension, or acquiring necessities and convenience.

If you are relatively new to money management, this guide will equip you with the right information to get started and ultimately become a pro at managing your finances. So, let’s get down to it.

Setting up a budget

Start by setting up the right budget. Although you must be ready to invest some efforts to master the art of budget creation, the mastery will help you to come up with the right budget and ultimately take control of your finances.

With the right budget, you are reducing your chances of going into debt or spending unnecessarily on unplanned costs. Your credit rating will most likely improve, and subsequently, your eligibility for a loan or mortgage. Likewise, you can easily identify potential saving options, and this increases your financial capability for conveniences like travels, a new car, and similar treats.

Requirements for a good budget

You will require some essential information to create your budget, including precise figures of your living costs and household bills. You also need to know how exactly you spend on insurance and other financial products, travel and transport, family and friends, and leisure.

The easiest way is to use a reliable Budget Planner, an application that helps you to work out your budget. You will only need detailed information about your income and spending, including bank statements, bills, and similar reports, to use a Budget Planner. It also allows you to save information for future reference.

An alternative to the budget planner app is a Spreadsheet or by manually writing it on a paper. You can also check online for other nice budgeting apps or budgeting tool specially created by your bank or financial institution. In the case of the latter, such tools pull information from your bank transactions directly.

Correcting your budget

Depending on your cash flow difference, a cut back may be necessary to achieve healthy personal finance. Talking about reducing expenses, you can opt for homemade meals rather than eating out, as well as canceling all secondary spending. A diary will help in keeping an accurate record of your expenses over time. Bank statements also provide such information provided you do most of the spending using your bank card.

Keep to your budget

This responsibility doesn’t lie with only use – you may have to involve your entire family. Make a suitable plan for all and a collective decision to stick to it. Determine how much there is to spend and how much everyone gets.

Reduce your mortgage and household bills

You will be surprised that most of your money goes into household bills. Hence, cutting back on these will reduce your overall spending and help you save more. Review your expensive mortgage or check around for a new one to save money.

Embrace Flexibility

Considering the changing nature of life, be open to reviewing your budget and making fixes if need be. For best results, schedule periodic reviews, for instance, once in three months. This will allow you to factor in changes like a pay rise or higher household bills.

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Settling loans and credit card debts

The most important rule here is to always settle the debt with the highest interest rates before those with lower interest rates. Such debts may include credit card debts, store cards (usually with the highest interest rates), and lastly personal bank loans (usually with the least interest rates).

Always abide by the terms of agreements in these debts. Ensure that you pay at least the minimum on credit card debts and stipulated monthly payment on other loan agreements, even if you are paying down a different debt entirely.

Seek help in serious debt cases

Perhaps you have not been meeting credit card or loan payments or behind with your ‘priority debts’ including Council tax, rent, court fines, mortgage, energy bills, and child support among others? Ensure that you consult a free debt advice charity.

Have a savings goal

Having a savings goal encourages you to save. Start by setting aside some money as emergency savings. This money will come handy in cases of emergency, for instance, a plumbing problem that needs an immediate fix. Such savings should be up to 3x your monthly expenses and kept in an instant access account.

Note that meeting your savings goal doesn’t have to be immediate. Give room for gradual but steady progress. Set aside some money every month for this purpose and gradually accumulate it in a dedicated savings account.

With your emergency fund ready, you can consider other saving goals like;

  • a car purchase without any loan
  • going on holidays without any bill accumulation before or after the trip
  • saving up for paternity or maternity leave convenience

Investing your savings

Once your savings appear to grow steadily, it is time to start putting this money into good use. First is pension – the more you add, the more comfort you are planning for your future. Likewise, come up with a suitable investment plan depending on your timeframe and goals.

Overwhelming debts?

Irrespective of how bad your debts look, you must first decide to get them sorted and then works towards that decision. Financial struggles can get you unsettled and deterred from trying to do the needful. However, not taking active steps will only worsen the situation. Instead, face the fears and stand up to the challenges.

Assess these debts – all of them – and know how much you have on your plate, then come up with a sustainable plan and a way forward out of the mess.

The Easy Guide to Money Management

Modified date: May 14, 2020

Two things make managing money difficult. The first is that for most of use, we always want more. We often see contentment not in who we are or what we do, but in what we have. The result is constant pressure we put on ourselves to have more. The second thing that makes controlling our money difficult are the endless issues and options when it comes to money. How much do we save for retirement and where do we invest it? How do we track our spending each month. Should we buy or rent a house? How much life insurance should we buy? The financial decisions we are called upon to make can feel overwhelming.

While no single article can cover every money management issue, in this Easy Guide to Money Management, we’ll look at 10 simple and easy to follow tips and tricks to help us better manage our money.

Money Management Tips and Tricks

  1. Track spending by using a debt or credit card: I hate keeping track of everything I spend. I’ve tried in the past, with good intentions and a fancy spreadsheet or money management software. But I just don’t keep up with it. So now I use a debit or credit card for virtually everything I buy. Everything. If I use a credit card, I pay it off in full every month (and earn travel rewards or other rebates along the way). And at the end of the month, I have a complete record of everything I’ve spent.
  2. Keep track of your net worth: Determining and tracking your net worth is one of the most important financial management steps you can take. Your net worth is simply the value of everything you own less the amount of all your debts. It’s net worth, not income, that determines true wealth and financial freedom. And it is key to remember that a monthly budget is closely tied to net worth. What happens with your monthly budget, whether you spend more than you make or make more than you spend, is reflected in your net worth. Make more than you spend, and the extra income ends up in either increased savings or decreased debt. Spend more than you make, and your debt has to go up. I’ve tracked my net worth on a simple spreadsheet for years, but you can use money management software such as Quicken or Microsoft Money if you want.
  3. Start investing today: I started investing as soon as I graduated from college. I did not wait until my school loans or other debt was paid off. It was not a lot of money at first, but even a little adds up over time. And don’t get twisted over where to invest your money. Picking sound mutual funds in a well diversified portfolio is a snap. Here are some articles to get you started:
    • How to pick your first mutual fund
    • How to Evaluate a Mutual Fund
    • How to Invest in Mutual Funds
    • Asset Allocation–An Easy Way to Invest
  4. Prepare for periodic expenses: Car insurance, life insurance, Christmas and other gifts, car repairs and the like never come at a convenient time. So be prepared. I recall how free it felt when I set aside 1/6th of my semi-annual car insurance bill each month so that when it was due, I had the money to pay it. It takes discipline to manage your money this way, but it is definitely worth the peace of mind. And if you are looking for an a place to stash your cash at good interest rates on savings accounts, check out these online savings accounts.
  5. Save for emergencies: Whether you save three months, six months, or even one month worth of living expenses, save for emergencies. Otherwise, you’re living paycheck to paycheck, and there is nothing more liberating than realizing you can survive for some period of time without earned income.
  6. Diversify your income: I don’t care how much you make from your job, having a steady stream of additional income from another source is liberating. I get my multiple streams of income by making money blogging and real estate investing. There are many ways to earn a second income. Just pick one and get rolling.
  7. Buy a home and live in it a long time: I know that with falling real estate prices, many now claim that renting is the way to go. But long term ownership of real estate can build substantial wealth; renting never will.
  8. Take advantage of free money: In my research for The Dough Roller, I’ve run across hundreds of ways to save money. And I’m particularly fond of money saving tips that do not require me to sacrifice anything. I take advantage of 0% balance transfer credit card offers; I buy store gift cards at a discount; I bought my last car on the Internet from a dealer 500 miles a way and had it delivered to my home; and I look for ways to lower my utility bills. I’m not frugal; never have been. But I also don’t pass up a good offer when I see one.
  9. Give to a good cause: Whether it is your church or some other charity, give some of your money away. What’s the point of all this money management fuss if we do not do something meaningful with at least a small portion of our income.
  10. Take advantage of the internet: The internet provides a wealth of tools to help manage your money. I’ve already linked to online budget tools above. But think of all the things you can do via the Internet in relation to money management: access your checking account, view your investments, apply for a credit card, get a mortgage, check the value of your home, check the value of your boss’s home, prepare and submit your income taxes, find money saving deals, comparison shop, and the list could go on forever.

So there is a list of 10 easy money management tips. Do you have other tips to help readers take control of their money? If so, share our ideas in the comments below.

Hack Your Finances in One Day: A Beginner’s Guide to Money Management

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You know it’s important to get your money under control if you ever want to get out of debt, go on awesome vacations, or retire someday. The problem is, a lot of people don’t know where to start or feel like they don’t have time. If you have just a day, we have you covered.

A huge part of personal finance is behavioral, so we won’t pretend this guide will give you complete mastery over your finances in a day. Anyone who’s worked hard to reach financial security will tell you: it takes time to learn better habits. However, you can make great strides in a day. If you’re new to personal finance, here’s what you can do to kick things off.

Build a Realistic Budget and Start Saving for an Emergency

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Most of us suck at budgeting because we think about it the wrong way. We think of it as a strict set of rules meant to keep us from spending money on stuff we enjoy. Forget that. Let’s kick things off with the crucial question that many financial planners ask their clients: Why?

Why do you want to get your finances in order? It could be travel, supporting a family, saving to switch careers—whatever. Your answer will serve as the backbone of your budget. Instead of a strict set of rules, your budget becomes a spending plan that supports what actually matters to you, even if it’s just saving up for a new laptop. It’s a lot easier to stick to that plan when it works for you, instead of the other way around.

From there, it’s time to pick a budgeting method. Here are a few examples:

  • The 50/20/30 Method : With this classic method, 50 percent of your income goes toward fixed expenses, like your rent or your cellphone bill. 30 percent goes toward flexible spending, like groceries or restaurants, and 20 percent goes toward financial goals, like paying off your student loan.
  • The Subtraction Method: This is dead simple. Add up all of your monthly bills. From there, take your monthly income and subtract from the total of your bills and then subtract more for savings. Whatever is left is how much you can spend in a given month.
  • Ramit Sethi’s Spending Plan: Personal finance writer Ramit Sethi suggests a variation of the 50/20/30 method with a little more detail. 50-60 percent of your take-home pay should go toward fixed costs, 10% should go toward retirement savings, 5-10 percent should go toward saving for other goals, and 20-35 percent should be guilt-free spending money.

Once you pick your method, budgeting comes down to a few basic steps :

  1. Make a list of all your expenses. (don’t forget the irregular ones!)
  2. Determine your monthly take-home pay.
  3. Divvy up your expenses into categories using the method you picked.
  4. Come up with a system for tracking. We’re fans of budgeting tools Mint and You Need a Budget . They make it easy to get started, but you’ll need your bank account’s login credentials. You can always use Excel , too.

Be realistic when you decide how much to spend in each category. If you spend $600 a month on restaurants, for example, don’t expect to go from $600 to $50 in a single month. Chances are, you’ll go back to your old restaurant habits, blow your budget, and give up on it completely. Buffer some room for reality. If you need to cut back on your spending, by all means, cut back, but you’ll probably have more success if you take it a little at a time . As money site Femme Frugality puts it, be liberal with your budgeting and conservative with your spending. In other words, it’s better to err on the side of caution and overestimate your spending.

This is also important: you need an emergency fund . This is a savings account you can pull from when your car breaks down, your dog needs surgery, or whatever emergency comes up. Without one, too many people resort to desperate solutions when they hit a rough spot.

When You Have an Emergency Fund, You Have Power

When you live paycheck-to-paycheck, you usually feel at the mercy of your employer. If you’re lucky

Most money experts say you should have between 3-6 months’ worth of savings in an emergency fund, but that probably seems damn near impossible when you’re just starting out. So start small: save $100, then a few hundred, then a thousand, and then worry about what your emergency fund should look like . For now, it should just be a small pot to tide you over in case of the worst. If you don’t already have one, budget for this savings goal.

Save Money on Every Bill Possible

As a money nerd, a bill audit is one of my favorite things to do. I go through each bill and research ways to save. We’ve done the research for you in our bill-by-bill guide to saving on your monthly expenses . It’s worth going through to look for savings on everything from your cell phone bill to your electricity to your streaming services. Here are some common bills people pay too much for and how you can save:

  • Cellphone plans: There are so many discount options these days, it’s worth seeing what’s out there if you haven’t shopped for a new plan in a while. Best of all, many of the larger carriers are trying to keep up with the savings by offering their own cheap options. Use a tool like WhistleOut to help you search.
  • Credit card interest: Surprisingly, 78% of customers who call to ask for a better credit card rate get what they want. Interest adds up, so it’s worth the call. Here’s a scrip t to help you do it.
  • Car insurance:Many of them offer discounts if you combine policies. If you have renters or homeowners insurance with a separate company, call your auto insurance carrier and see what your bundled rate would be.

Start with those three—you might be surprised at how much you’ll save. Then audit all of your other monthly bills and see if there are additional ways to cut costs. The best part of this exercise is you do the work once but continue to save month after month.

A Bill-by-Bill Guide to Saving Money on Your Monthly Expenses

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Come Up With a Debt Plan

If you’re in debt and you don’t have a plan to get out of it, it’s time to make one .

The first step: make a list of all of your debts. Track them in a spreadsheet, or just write them down. Make a column for the following: balances, interest rates, and minimum payments. From there, revisit your budget and figure out how much money you have available to go toward all of your debt. Set a general goal to pay off X amount of debt every month.

Second, pick a debt-busting method. Some people prefer the Stack method , where you pay off your highest interest rate balances first, then focus on your lower interest rates. If you have a handful of smaller debts, though, you might prefer the Snowball method , which focuses on paying off your debts with the smallest balances first. If you’re on the fence, research shows the Snowball is the more effective method. People tend to stick to goals when they see progress. Since the Snowball method focuses on quicker wins, many people find that motivating.

Whichever method you choose, the next step is to prioritize your debts accordingly. Make a list of debts ordered by which one you’ll focus on first. Of course, you’ll still pay the minimums on your other debts (don’t want to rack up late fees). When your priority debt is paid, add that amount to your next debt on top of the minimum. Then move on to the next debt, and the next one, until you’ve tackled them all. Yeah, it’s easier said than done, but before you make progress, you need a plan.

Here’s a calculator that will tell you how long you have until you’re debt-free. This spreadsheet can help you calculate when you’ll back off debt with the Snowball method in particular.

A Step-by-Step Guide to Getting Out of Debt

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Check Your Credit Report

Your credit matters, particularly because if it’s bad , it can make your life difficult. Not only is it harder to get credit cards and apply for loans with poor credit, you might also have a tough time renting an apartment or getting a job. Bill providers are also legally allowed to charge you a fee for having bad credit. It’s important to know where you stand , and that means checking your credit score and, more importantly, your credit report.

What Your Score Means

There are a number of places you can see your credit score for free : there are CreditKarma and Quizzle , for example, and Mint offers free periodic credit scores, too. Discover credit card holders also get their scores for free on their monthly statements. Once you know your score, you want to know where you stand. Here’s the range for credit scores, according to NerdWallet:

  • 300-629: Bad credit
  • 630-689: Fair credit, also called “average credit”
  • 690-719: Good credit
  • 720 and up: Excellent credit

If your score is bad to fair, you have work to do, and that work starts with checking your credit report. Even if your score is excellent, though, you want to check your credit every now and then. If there are any issues, like late payments or fraud accounts, you can nip them in the bud.

How to Read Your Report

Annualcreditreport.com is the best site for getting a free copy of your report. You’re entitled to a free copy every year from each of the three credit scoring agencies (Equifax, Experian, TransUnion). Once you get a copy of your report, you’ll notice a few general sections:

  • Personal information: Your name, address, etc.
  • Public record information: Any liens, wage garnishments, or bankruptcies.
  • Creditor information: The meat of your report, where you’ll see detail on each credit account you’ve opened.

Your accounts are split into two main categories: accounts in good standing and potentially negative items. If you’ve paid any accounts late or they’ve gone to collections, for example, you’ll probably see them under “negative items.”

You’ll want to review these items and make sure they’re all legit. If there are mistakes, you can dispute them (the Federal Trade Commission has sample dispute letters here ). Otherwise, if there are too many negative items on your report, you just have to improve your credit .

Paying your debt in full and on time is the best way to fix your credit, but FICO offers some additional information on how your credit is calculated, which is helpful. According to FICO , your credit score is based on five categories:

  • Payment history (35%): Your payment history is your history of paying past accounts on time. The better you are at making payments on time, the higher your credit score will be. According to the site: “A few late payments are not an automatic ‘score-killer.’ An overall good credit picture can outweigh one or two instances of late credit card payments.”
  • Amounts owed (30%): Lenders what to know how much outstanding debt you owe. If you’re close to reaching your credit limit for an account, (“maxing out”), this can negatively impact your credit score, the site says.
  • Length of credit history (15%): A longer credit history will increase your score, according to FICO. FICO also considers how long you’ve been actively using those accounts.
  • Types of credit (10%): Your score also considers how diverse your credit mix is, including credit cards, installment loans, retail accounts, mortgage loans, and finance company accounts. It also considers the number of accounts you have open. And FICO adds that closing an account doesn’t make it go away; it will still show up on your report.
  • New credit (10%): Inquiries into new lines of credit can lower your score, FICO says.

Beyond paying your debt bills on time, you want to keep any accounts that are in good standing open and make sure to use as little of your available credit as possible. Fixing your credit takes time, but reviewing your report is the crucial first step.

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Sign Up for Your Work 401(k)

A 401(k) is a retirement savings accoun t offered through your employer. You set aside a certain amount of money each month from your paycheck, and use it to invest money using this account. Over time, your money grows and ideally, when you retire, you’ll have a big stack of money that’s been growing for years. You can live out your dream of retiring on a houseboat or buying an RV and road tripping around the country.

A Beginner’s Guide to Starting a 401(k)

Let’s say you’ve started your first job. Or, maybe, you’ve simply started to think about saving for

Many employers that offer a 401(k) also offer something called a 401(k) match. They match a portion of your own savings into the account, up to a point. As our own Melanie Pinola explained :

A common matching scheme is a 50% match of your contribution up to 6% of your gross salary. So for every dollar you put in, the company will put in 50 cents. The max a company will put in for a person with a $50,000 salary, in this 6% cap scenario, per year, is $1,500.

Calcxml 401 match calculator can help you crunch the numbers to see how much you can squeeze out of your employer. (It’s also worth noting that many companies have a vesting schedule, meaning you can only get the “free” money they give you if you stay at the company for a certain amount of time).

If your employer offers a 401(k) match, you definitely want to sign up, otherwise, you’re leaving money on the table . Once you have the forms to sign up for the plan, you’ll have to decide how much of your paycheck you want to put toward your savings. Most experts agree: you should at least put enough to get the match. If that stretches your budget too thin, though, and you end up racking up late fees and overdraft fees, it might not be worth it. Revisit your budget and decide how much you can afford to save.

From there, you have to pick some investment options. Your employer usually works with a broker to come up with a list of options to choose from. This means you’re stuck with the list they offer, and sometimes, the list isn’t great. Investor Place lists the five major types of funds you’ll probably have to pick from:

  • Stock Funds: As the name suggests, this type of fund covers a variety of stocks that you can invest a percentage of your account in. According to Investor Place, “Most 401ks only offer a handful of stock funds to choose from, so selecting funds in this category shouldn’t be hard — just look at expenses (lower is better) and long-term returns (higher is better) to find the best fit.”
  • Target-Date Funds: These funds are pretty simple and basic. You pick your target date for retirement, then pick the matching fund. Because they’re so simple, there’s not much maintenance, as the fund adjusts your asset allocation over time. The fees of target-date funds might be higher.
  • Blended-Fund Investments: These funds have a set ratio of stocks and bonds. You can pick one that’s appropriate for your situation. This means you’ll have to consider your tolerance for risk and how many years you have until retirement.
  • Bonds/Managed Income: These funds are meant to safeguard your money, but your money won’t grow much with these funds.
  • Money Market Funds: Investor Place calls the money market fund a “glorified CD.” There’s zero growth here, and, in fact, these funds barely keep up with inflation rates. They recommend avoiding money market funds if you want your money to grow

We have a guide to set-and-forget investing for an idea of which funds to start investing in, but the 401(k) paperwork might give you a general idea of how to get started, too. Basically, it comes down to your age, risk level, and how long you have until retirement.

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Once you open your 401(k), there are a few things to keep in mind. Sometimes when you open a 401(k), you’re given a default investment option and that’s often a “money market fund.” You’ll get little to no growth with a money market fund. A 401(k)s default isn’t customized for your needs and risk level, so make sure to actually pick some investments once you open your account. If you ever leave your job, don’t abandon your 401(k), either. You’ll have to roll it over into a new retirement account. When that time comes, read our guide on how to do it.

And then there are 401(k) fees. Many 401(k) plans are expensive to maintain, but you can use online calculators to determine and compare how much these fees will cost you over time. It’s still worth getting the match, but if your 401(k) fees are high, you probably want to invest anything extra elsewhere.

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Open an Individual Retirement Account

Don’t have an employer who offers a 401(k)? You still want to save for retirement, and an Individual Retirement Account can help you save. Even if you do have a 401(k), an IRA is a great way to sock away extra money or just invest with more flexibility and control.

What if you’re in debt, though? Should you still save for retirement? Not all experts agree on what’s more of a priority, debt or retirement, but you can read more about that here , then decide if you’re ready.

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Like a 401(k), an IRA is an account in which you save money for your future retirement. There are two basic types of IRAs: traditional and Roth. Both of them offer a different kind of tax advantage.

Traditional IRAs Offer Tax-Deferred Growth

With a traditional IRA, the earnings from your savings into the account are tax-deferred. This means you pay taxes on your savings and earnings when you withdraw the money (probably when you retire), but your contributions (savings) are pre-tax. Come tax time, if you’re eligible, you can deduct the amount you save in a traditional IRA from your income. In other words, you pay less in taxes now .

Roth IRAs Offer Tax-Free Growth

With a Roth, you can’t deduct your savings from your income like you can with a traditional. However, when you retire, you won’t pay taxes on any money with you withdraw. Your savings into the account are post-tax; meaning, you’ll pay income tax on the money you put into the account. In other words, you pay taxes now. But that money will grow tax-free, which is awesome. Not everyone is eligible for a Roth, but you can check your eligibility here.

The general rule of thumb is, if you’ll be in a higher tax bracket when you retire, you should pick Roth. If you’re in a higher tax bracket now, you should go with traditional. That’s a really basic answer, though, so read our guide to IRAs to make the best decision for your own situation. There are even more types of IRAs. If you’re self-employed, you might also want to open a SEP-IRA, for instance. But for the most part, a basic traditional or Roth IRA is the way to go.

IRAs also have contribution limits, so keep them in mind when you decide how much you want to save in one. Here are the contribution limits for 2020:

  • $5,500 ( $6,500 if you’re age 50 or older), or
  • your taxable compensation for the year.

Again, you’ll want to revisit your budget to see what your own savings amounts are. Many experts say you should invest at least 10 percent of your income for retirement. That number might seem high for a lot of people, and that’s okay— every little bit helps . If you want more detail on how much you should save, though, we’ve written a detailed guide here . The basics come down to:

  • Determine when you want to retire.
  • Estimate how many years to include in your plan (i.e., how long you are likely to live).
  • Estimate what your expenses will be in retirement.
  • Make an inventory of your current assets and savings.

From there, you’ll actually open an IRA at a firm like Vanguard (a popular option with super low fees). You can easily do it online. It will take a while to link your bank accounts to your IRA so you can start making contributions. In the meantime, do some research and figure out what kind of investments you want to buy. We recommend some really simple mutual funds you can get started with here.

Learning to be good with money takes time , and a lot of it is just about adopting better habits and behaviors. That said, you might as well get started with the practical stuff. In addition to these steps, make a goal to learn a little bit about money every day. You’re more likely to stick to a budget and debt goals if you have financial literacy on your mind every day, even if it’s just fifteen minutes.

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