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Financial Freedom: Building the bankroll, part 2

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We’ve seen that a key part to underwriting Bumhood is living below your means and using the resulting extra cash from income to build savings.

The corollary to this important principle is that your money needs to work for you. That means it has to earn money instead of you having to go to work to earn a paycheck.

How to make this happen? Invest. Your strategy should not be excessively conservative, because truly safe, FDIC-insured instruments such as high-interest savings accounts and CDs don’t return enough to keep up with inflation. Although clearly some cash should reside in your bank or credit union, where it will be insulated from a major market crash such as the one we recently saw, to grow your money you have to take some risk. This means investing something in the stock market or (yes!) in real estate.

Investment plans that work to support bumhood are long-haul arrangements.* Savings should be invested for the long term in reasonably stable instruments such as fairly staid mutual funds and left there, even when the market slides. Low-overhead mutual funds are an excellent choice, because the various costs involved in maintaining them do not bite significantly into your gains. Vanguard and Fidelity funds lead the pack here.

Some mutual funds buy stocks; others buy bonds; still others are balanced funds with a variety of investments. Read the prospectus for each fund that interests you, and be sure your choices don’t duplicate each other. Most advisers suggest that equities investments be allocated about 60 percent to stocks and about 40 percent to bonds, because as a general rule when stock values fall bond values rise. (This is a huge oversimplification, as I’m sure we’ll hear from readers. Study up on investment products. Several “For Dummies” books on the subject have good to excellent reviews, and regular reading of the Wall Street Journal and the New York Times business section can be instructive.)

Stocks and bonds are not the only places to grow savings. Some people have done well investing in rental real estate. This also is a long-term hold: expect to keep the property for 10 to 20 years before it turns a profit. As we’ve seen, for investors real estate presents no less risk than the stock market, and so you  need to be prepared to watch values go up and down. A quick perusal of Amazon’s offerings on real estate investment will clue you to the amount of snake oil out there: be extremely careful, and do not operate without a trusted adviser who can prove his (or her) expertise. As with the stock market, it’s important to do your homework and know what you’re doing before investing. If real estate interests you but the prospect of dealing with renters does not, consider a real estate investment trust (REIT) or an REIT mutual fund. Sometimes limited partnerships invest in commercial real estate, although this tool is probably not for everyone.

Because money sitting in the bank does nothing for you—it just sits there—it’s crucial to put your savings to work by investing in a diversified set of financial instruments, ranging from the relatively safe (CDs, the money market) to relatively risky. The degree of risk depends on your age (i.e., how many years you have left to make up any losses) and your personality. To make money work for you, you’ll need to take some risk with some part of your savings. But as you draw closer to your projected escape from the day job, it makes sense to pull back from riskier investments and shift funds to more conservative tools.

One way or another, at any age your savings should be working for you, and some part of it should be in stocks or instruments that earn similar returns. Over the years, my savings have returned about 8 to 9 percent, on average. Of course, that faltered when the Bush economy crashed. While the artificially pumped-up economy was hot, some months I would earn $8,000 on a $250,000 investment. Although all that went away when the market collapsed, returns are now back up in the 8 percent range.

Thus if I draw down the widely recommended 4 percent—more than I need to live on, as a matter of fact—savings will continue to grow even without my adding any  new cash.

And voilà! Full-blown financial freedom: Return on passive investments that meets or exceeds the amount you need to support yourself. The less you spend on your lifestyle, the more you can save, the more you can invest, and the sooner you can get off the day-job treadmill. Living below your means, faithful, regular saving, and wise investments can spring you free sooner than you think.

The Financial Freedom Series

• An Overview
• Education
• Work
• Debt
• The Health Insurance Hurdle
• Own Your Roof
• Bankrolling Bumhood, Part 1

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* I am not an investment adviser! I am just a writer sitting in front of a computer. No part of this information should be taken as investment advice. For advice on financial planning, consult a tax professional and a certified financial planner. Always read all prospectuses and related information before investing in any stock, bond, or mutual fund.

Good grief! Near-disaster with Medicare Part D choice

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So in the wee hours of the morning, while enjoying another spate of insomnia, I decided to kill some time looking up Wellcare, the Medicare Part D provider toward which I was leaning by the end of yesterday’s exploration of that corner of the insurance industry’s corporate bureaucracy.

I thought that  exploration was through the Looking Glass? Ah, no, my friends: that was down the Rabbit Hole!

Turns out that in 2009 the federal Centers for Medicare and Medicaid Services enjoined Wellcare from enrolling new customers in its Medicare Advantage and Medicare Part D programs because of the egregiousness of the complaints against it. Says a Florida newspaper:

Regulators cited a long list of problems: deceptive sales practices, delays with urgent customer problems, forged enrollment documents and the highest complaint rate in the nation.

The “problems” have been going on for a while. In 2007, the FBI, HSS, and the Florida Attorney General’s office raided Wellpoint’s Tampa headquarters.

In a now-unsealed plea agreement [says Wikipdia], prosecutors and a former employee said the company inflated expenditures by submitting fake documents to the state. Under some mental health care contracts, WellCare was paid a flat per-patient fee and required to spend at least 80 percent of it on care. Any leftover amount beyond 20 percent was to be repaid to the state, but the bogus expenditures allowed WellCare to keep that surplus. WellCare agreed in August to repay $35 million, its best estimate of the total wrongly kept from 2002-2006. After the raid, the company restated its quarterly and annual profits, driving down net income by $32 million, and saw its top three executives resign. No criminal charges have been announced against WellCare or its officials but investigations by Florida, Connecticut and federal prosecutors are ongoing. The Securities and Exchange Commission is leading an informal investigation, and Wellcare faces numerous shareholder lawsuits and sealed whistleblower complaints, the company’s SEC filings say.

This is one of the best that Arizona offers?

Well, hell. I’m glad I looked the company up before I got myself into its Part D plan. But damn! this leaves me right back where I started before I spent several hours of my time trying to figure out which of these hideous outfits won’t rip me off or try to keep me from buying needed drugs.

There doesn’t seem to be anyplace you can go to get a straight story about these companies. The material at the Centers for Medicare and Medicaid Services website is highly technical—there’s nothing that seems helpful for consumers. The HealthMetrix Research site addresses Medicare Advantage programs, which don’t interest me. The National Senior Citizens Law Center (NSCLC) noted in October 2009 that Wellcare still appeared in the government’s listing of Part D providers even though it was still prohibited from enrolling new customers. Very few, if any, intelligible resources are out there.

The Center for Medicare Advocacy notes,

Medicare beneficiaries, their advocates and other helpers cannot be assured that the information provided to them on the Plan Finder is accurate. They need to drill as deeply as possible into the Plan Finder tool to ascertain whether reference-based pricing and other utilization management tools apply to their prescriptions. They need to check the plan web site and contact the plan customer service line to ascertain how the pricing might work. Even then, they cannot be assured that the plan they believe to be the lowest cost drug plan for them will, in fact, provide the most coverage at the lowest cost.

NSCLC advises people to talk to their State Health Insurance Assistance  Program (SHIP). In Arizona this office is staffed by volunteers. I’ve had a couple of good experiences with those folks and one that was not so great. The last guy I got on the phone was an utter moron. He flat refused to listen to the question I was asking him and instead nattered on and interminably on with stuff that wasn’t relevant and that I already knew. Another one, a woman, was very nice and personally supportive, but when you came right down to it she just wanted to chat—what she told me wasn’t especially useful or enlightening. A third person gave me some very good information. But you see the issue: I had to call three times and talk to three different people to get a cogent answer to a simple question.

I can see I’m going to have to blow another day trying to figure this garbage out. Beyond annoying…beyond frustrating…it’s infuriating!

Medicare Part D: Another adventure in Wonderland

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Just shoveled a couple more piles of bureaucratic grief off my desk, finally. I’ve put off dealing with Medicare Part D and Medigap insurance, mostly because after the interminable hassles entailed in getting free of state service, I’ve developed quite the flinch reflex about filling out forms. The mere thought of having to fill out another form makes my gut clench. And the prospect of having to navigate still more bureaucratic shoals gives me a headache. Put them together: you get a case of insomnia that would keep Dracula awake at noon.

With the “have to go to class now” excuse mooted by spring break, this morning I forced myself to return to the Medigap application from Mutual of Omaha, an outfit that, from what I can tell, is among the least rapacious of the insurers selling these products in Arizona.

As you might guess, I’m less than fond of medical insurance companies. Several hellish experiences in the past have led me to regard the health insurance industry as the Evil Empire of Bureaucracies. Contemplating a DIY transaction with any of the dark angels that inhabit that place gives me the willies. When Mutual of Omaha’s application arrived in the mail, I glanced over it and then set it aside on my desk, where it’s been gathering dust and sinking beneath the steady sprinkle of still other pieces of paper I don’t want to handle.

But it wasn’t as horrible as I feared. Though the form was six crowded pages long, two pages didn’t apply to me, and so trudging through it consumed only a half-hour or 45 minutes. The worst part was having to sign a form giving the insurance company access to all my private medical records, no holds barred. Sign, wretch, or it’s no Medigap coverage for you! I just hate that. Once I had an insurance company demand that my doctor hand over twenty-five years’ worth of notes on every consultation and treatment I had ever had with him or any of his partners. As you can imagine, I found that deeply offensive. I still find it deeply offensive. Yea, verily, I find the entire lash-up that is the U.S. healthcare system deeply offensive.

Anyway, off it went. That will set me back $91 a month.

Next, it was on to the Medicare Part D (Prescription Drug Coverage) conundrum. After you’ve figured out which of the rapacious insurance companies will provide you with a Medigap policy (which covers the very large holes in Medicare Parts A and B) at the least extortionate price, you are required to sign up for Part D, another pushmi-pullyu program that tries to make up for traditional Medicare’s lacunae.

Healthy as a horse? Don’t think you need it? Well, screw you! If you don’t sign up the instant you become eligible for Medicare but instead wait until you think the chances of illness are higher, then you’re charged a stiff fine. So it’s get on the boat now or pay through the schnozzola for the privilege of swimming out to the boat later on.

As with Medigap, a mob of insurers offers up Part D policies. Coverage is pretty much uniform, but monthly premiums range from around $10 a month to over $80 a month. Because Medigap and Part D are regulated by the federal government, the plans offer the same general features. As far as I can tell, the major differences are the deductibles, the rules governing which meds you may and may not have, customer (dis)service, and the ways individual companies find to maximize the cost of meds for the customer.

Mercifully, the feds have a site that will conjure up a table comparing aspects of all the Part D providers in your state. When I said I was 65 and about to start Medicare in Arizona, this site disgorged details on 44 outfits selling insurance here. Ugh!

To compare these details, you have to call up a separate page for each company, wherein you find all sorts of microscopically printed information. It does allow you to compare apples with apples, but the chore is not easy. To simplify matters, I picked a half-dozen that looked like they had relatively decent customer satisfaction (reviews are rated, Amazon.com-style, with one to five stars; for Arizona, none achieved a five-star ranking overall and only a couple made it to four). The “details” pages break the ratings down into four categories: customer service, complaints, a vague “member experience,” and drug price and safety. Several other issues are also presented in more detail.

On the surface, dizzying. To arrive at something like a meaningful guess at a reasonable choice, I set up an Excel spreadsheet. In it, I created columns for the monthly premium, the government’s estimated total monthly cost for a typical well customer and for someone who suffers a serious illness, the deductible, and the four ratings categories.

Strangely, the premium bears only vaguely on the probable cost of medication for a serious illness, such as a heart attack or congestive heart failure. With most policies, the overall monthly cost of such an ailment ranges from $150 to $200. That’s not always true, though: if you’ve subscribed to Aetna’s $82.20/month policy, a major illness is likely to cost you $200 to $250 a month.

Once I’d entered the data, I sorted it by several criteria. Click on the tables to see them in a readable font size.

The results, I think, helped to clarify matters. On the lower end, where monthly premiums are vaguely within reason, the annual deductible is, with one exception, an astonishing $310. This means, of course, that if you’re healthy and, like me, take no medications, or even if you take only one or two in generic form, you’re paying for air: most of the time your costs will come in way under the deductible. Paying more to get out of the deductible pushes your monthly overall cost so high (as, for example, in the pricey Aetna plan mentioned above) that you’d lose unless you had a very expensive chronic condition like Parkinson’s or MS.

Interestingly, the plan sold by AARP, which vaunts itself as the champion of the elderly, ranks rather low by most criteria.

An outfit called Wellcare consistently comes up with good to high ratings. It does especially well in the important categories of performance ratings and of drug safety and cost. This company offers two plans in Arizona, the “Classic” and the “Signature.” From what I can tell, the only difference is that the “Signature” plan has no deductible. When you compare the two plans’ overall monthly cost, you discover that even though the no-deductible plan will run you $15 a month more than the plan with the $310 deductible, the plans’ overall monthly cost is almost identical. So basically, you can expect the same results from the $20/month plan as you can from the $35/month plan!

So, though I have yet to go out on the Web to read consumer complaints, I’m leaning toward the Wellcare Classic. The cost is on the low end, but apparently service and coverage are about the same as the higher-end Signature policy. Customers are better satisfied with Wellcare than with most other vendors: the performance rankings put it second behind the pricey Medco, but only by a quarter of a point. Wellcare is the only one of our selected companies to achieve 5 points in any category—and it does so in the important matter of drug safety. (You understand, these outfits are capable of dictating what drugs you can take, and they do so on the basis of cost, ignoring potential side effects and interplay with certain chronic ailments like diabetes.)

Once all these plans (not to say “schemes”) are cobbled together to provide adequate healthcare coverage, the cost is astonishing.

Medicare Part B will cost me $110 a month. People who are already enrolled get no increase from the 2009 premium of $95; those who come on board in 2010, however, get an inflation gouge even though, like other beneficiaries, they get no commensurate increase in Social Security. Medigap: $90.80 a month. Medicare Part D: $19.70 a month. Total: just over $220 a month for starters.

I do understand that many people are paying a much larger gouge to cover one person. But still… Compared to the $36 a month I’ve been paying for the same coverage with no deductible and with only modest copays, it looks pretty stiff.

And to figure this stuff out, you end up taking a swan-dive through the Looking-Glass. I fail to understand why it’s necessary to make this business so complex, so difficult, and so scattered that you have to build a freaking spreadsheet to parse out your best choices!

Despite regulation that is supposed to guarantee uniform coverage, it has taken hours of analysis and puzzlement to identify Medigap and Part D policies that look like they won’t cheat me and appear to provide tolerable customer service. The whole process has been confusing and difficult…and I think I still have most of my marbles.

Imagine the confusion this mess creates for less educated or more vulnerable elders—and the opportunities to prey on them! It’s just effing inexcusable.

Update

“Inexcusable” about describes it. The plot thickens: as it develops the government’s opaque site dispenses information most kindly described as incomplete. Check out the next revelation.

Financial Freedom: Building the bankroll, part 1

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In the quest for financial freedom—the search for a way off the day-job treadmill—it’s important to build the habit of living not just within your means but below your means.

When you live within your means, you spend no more than you earn. In living below your means, however, you spend less than you earn. This allows you to put money aside for future use; to wit, early retirement. The scheme is pretty simple:

• Live below your means;
• Save a specific amount each month;
• Also set aside whatever else you don’t spend;
• Stash your savings in investments and leave it there.

Saving is a strategy you can start at quite a young age, from the moment you begin to earn. My first full-time job paid a grandiose $300 a month. After paying the rent, I had $200 to live on. From that I budgeted $15 to buy myself some clothes or shoes and $20 to put into savings. Following the old adage, I always paid myself first. We didn’t have automatic electronic funds transfers in those days; I had to physically go into the bank to deposit my paycheck, and while I was there I had a share of it deposited to a savings account. If I hadn’t spent the previous month’s clothing budget, I transferred that or the amount remaining from it to savings, too. I still do the same today, only instead of $20 I put aside $200 plus anything else that doesn’t get spent.

It doesn’t sound like much, but over time it adds up. And when you’re young, your greatest financial asset is time. Twenty dollars a month invested at 8 percent starting in, say, 1967, when I began working, today would amount to $89,498.86. If you began investing $200 a month today and worked for twenty years, in 2030 you’d have $117,804. That’s a respectable amount, especially if you’re saving from after-tax income so that this is on top of your 401(k) or 403(b).

Yes. That’s what I’m talking about here: not only investing before-tax income in whatever savings plan your employer offers, but also setting aside something from take-home pay.

For most people, $200 a month is minimal. In fact, while I was still working I was setting aside about $370 a month, plus whatever was left over from my general operating expenses. Over 20 years at 8 percent, $370 a month would add up to $217,937.55—about as much as my 403(b) accrued in 15 years with matching contributions from my employer. In other words, the habit of saving and investing on your own can double your retirement savings…and at least some of it will be in instruments that you can access before age 59½, a crucial factor for those of us who do not intend to stay in the traces until we drop.

Even if your earnings are modest, it’s surprising how many ways you can find to unearth cash for savings and investment.

If you’ve recently succeeded in paying off debt, then you know that you can break loose a certain number of dollars from your income for purposes other than mere survival and indulgence. If that’s your case, instead of diddling away the newly freed-up income that you were having to use to service debt, put it into savings.

If you’re using the “snowball” approach to debt payoff, once you’re out from under the debt, put the snowballs into savings. If you’ve “snowflaked” debt away, keep on putting every little windfall aside, only put it into savings and investments.

Similarly, when you get a raise or move to a better-paying job, don’t change your standard of living. Put the increase into savings.

More proactively, start a side income stream and invest all the after-tax proceeds for the future. My freelance endeavors, for example, have earned around $8,000 to $10,000 a year. Eight grand amounts to about $666 a month; invested at 8 percent over our 20-year period, it would add up to $392,288.

Living below your means entails downsizing before you upsize. Instead of buying the biggest, most grandiose house you can afford, for example, buy a more modest but comfortable house. Or rent instead of buying and save the difference between the rent payment and mortgage payments for comparable digs. Refrain from buying the largest, fanciest vehicle your paycheck will support; get a car you can pay off quickly and use the amount you’d have to put into payments to build your Bumhood stash. Find better ways to entertain yourself than sitting in front of the boob tube, and then ditch the cable TV. Get rid of the land line. Learn to cook, and eat better for less by eating in instead of haunting restaurants.

If you never develop the habit of buying more than you need, you’ll never miss what you don’t have. Obviously you don’t have to live like an anchorite. But too many apparently middle-class Americans fail to distinguish between indulging their wants and providing for their needs. As a result, they’re really not in the financial middle class: they’re actually poor folks who are in way over their heads.

By April of 2009, the average household saving rate was only about 4 percent of disposable income. Let’s say you have $48,000 left after taxes from a $60,000 household  income: that would give you an annual savings rate of $1,920—significantly less than the rather modest $200/month we started with in this discussion. If your 4 percent includes your required contribution to an employer’s deferred saving plan, then you’re not even putting $160 a month ($1,920 ÷ 12) aside from take-home pay.

Meanwhile, economists at the Federal Reserve estimated (also in 2009) that despite the slight increase in U.S. households’ savings rate, most savings were going to pay off debt, which had accrued at a staggering rate during the recent boom, when consumption far exceeded income. To eliminate this household debt, the Fed observes,

Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018.

Clearly, if you start out with little or no debt and never accumulate debt, instead of pouring your savings into some already spectacularly wealthy banker’s pockets you can put your money to work for you. Living below your means is, then, the first stage of building your Bumhood bankroll.

The Financial Freedom Series

• An Overview
• Education
• Work
• Debt
• The Health Insurance Hurdle
• Own Your Roof
Building the Bankroll, Part 1
Building the Bankroll, Part 2

Purchases!

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Thanks to FrugalScholar‘s mention in a comment, several moons ago, of the online store Footprints, I found a source of shoes from the original maker of Dansko shoes, which back in the day were the original, authentic pain-frees.

Dansko used to make the classic nurse’s clog—truly an ugly clunker and laughingstock of the modish set, until styles changed and suddenly young women would bounce up to us gimpy old dinosaurs and ask where we got the great shoes. My feet won’t tolerate normal women’s shoes, and, not being much of a believer in the adage that beauty knows no pain (far as I’m concerned, if you have to hurt to be pretty, I’ll keep on being homely, thank you), I’ve worn Birkenstocks, Mephistos, Naots, and Danskos for years.

Mephistos are now priced well beyond the reach of sanity, so they’re out. About three years ago I induced a roaring case of Achilles tendinitis by traipsing around in a pair of Earth Shoes, whose negative heels are bad for your feet and legs, the manufacturer’s health-storesy ad campaigns to the contrary. Since then, I haven’t been able to wear Birkies or Birkenstock knock-offs, which pretty much lets out most styles in Mephisto and Naot. Dansko changed hands a few years ago, and in the new regime sizing changed so the shoes no longer fit well, and quality dropped so noticeably that some people think the manufacturing was outsourced to China.

Sooo…. That doesn’t leave an awful lot of choice. Like, none?

Thus it’s been a while since I’ve bought any shoes, and, needless to say, most of my clodhoppers are wearing out. I really, really need new shoes, and since the tendinitis recently flared up again, I need a decent-looking pair of pain-frees with a strap or open back that will not put pressure on the back of my ankle, which just now hurts quite a lot.

Fortunately, Sanita, the original makers of Dansko, has quietly continued to manufacture the same kind of shoes. These still fit, still are made to last a lifetime, and still look…well, good enough for nurses and dinosaurs. Some of the styles, actually, are pretty cute. These “Freya” sandals, for example, are not too hideous. They look quite very much like a pair of original Danskos I wore until they dissolved into shreds, come to think of it.

Also much needed were a pair of strappy sandals for this summer, preferably in brown. And lo, what should come up on the Footprints site but a model named “Havana.” I think these should be OK. They’re better than utterly ghastly, anyway.

The first time I visited the site, at FrugalScholar’s behest, I came across and coveted a great pair of CFMs that look like they’d go spectacularly with jeans, my favorite costume. “Christie” is not exactly a CFM because it does have an ankle strap, but…what can I say? Believe it or not, the raised heel is specifically what the doctor ordered for the inflamed tendons. More or less. How my august orthopedist at the Mayo would regard the wooden soles does not remain to be seen, because we are not gonna tell him about that, no way no how.

All of these goodies were either close-outs or seconds, marked way, way down. So, the bill for three pairs of shoes that have a good shot of not hurting my feet came to just $149.85—that’s only about fifty bucks a pair, a lot less than I’ve resigned myself to having to pay for pain-frees. Matter of fact, I’ve dropped $150 on a single pair of decent shoes that didn’t hurt. Many times. Shipping was only $12, less than the sales tax would have been had I managed to find any such things here in Arizona.

So I felt pretty good about that.

From Footprints.com it was on to Amazon.com, there to pick up a $10 bottle of AlphaHydrox, the AHA goop that’s no longer sold in local stores, far as I can tell. This is the stuff I used until three or four years ago, to good effect. About the time it disappeared from retail shelves was, coincidentally, about the time I fell into a deep enough blue funk to abandon taking care of my skin and quit wearing make-up. Being unable to find the stuff now that I’ve perked up, I bought the RoC wrinkle cream whose retinoids led to the late, great complexion fiasco.

The “enhanced lotion” contains a 10 percent dose of alpha hydroxyl acid (AHA), about as strong as you can get this side of the pharmacist’s prescription pick-up booth. The so-called “soufflé” is supposedly 12 percent AHA, but after the RoC adventure I decided that discretion was the better part.

AlphaHydrox also manufactures something it bills as a “targeted skin lightener,” much ballyhooed by Amazon reviewers for effectively fading age spots. This product contains hydroquinone, a chemical that interferes with melanin production; enough concern has arisen about its safety that it is banned in France, and the FDA at one point considered banning its over-the-counter sale in the U.S. It can irritate your skin, and so you probably wouldn’t want to use a product that combines AHAs with hydroquinone, as this one does.

At any rate, though the 10 percent AHA lotion itself cost only $9.99, in one respect I didn’t do as well as with the shoes: shipping was $2.75, a whopping 27 percent of the sale price! If I could find it in town, I wouldn’t think of ordering it online at that rate. But I can’t, so I did. If it works as well as it used to without causing another skin-scorching episode, I’ll probably find something at Amazon to trigger the free shipping and then order a boatload of the stuff.

And so it goes. Otherwise I have accomplished exactly nothing today. All the comparison shopping for the shoes occupied about as much time as a real-life drive-through-the-traffic, trudge-through-the-mall, wait-in-line-to-pay shopping trip would have consumed! Oh well. At least it didn’t use up any gas.

😉