Early Retirement Extreme - The rest of the story

The personal finance blogoshere is filled with amazing writing talent, tremendously smart people that dedicate their time and energy to provide something of value to others. Of them all however, today’s guest post writer has challenged my thinking about efficiency, frugality and money management more than others. His extreme approach is not for everyone, but everyone can learn valuable lessons from Jacob; owner and writer of Early Retirement Extreme. It is an honor to share part II of Jacobs story.

There are several ways to measure financial independence. One of them is the 4% rule which is known to any retirement planner. Another is actually numbers. In my case, I became financially independent in the 4% sense when I was 30 years old, that is, close to exactly 5 years after I started saving (or the equivalent of a 25 year emergency fund). Becoming financially independent is like turning 18 or 21. Physically you don’t feel it, but you know that something has changed. Your step becomes a little lighter because your freedom just increased tremendously and you can now do things you couldn’t do yesterday. At that point, I knew I did not have to work anymore if I did not want to. Most people don’t cross that point until they are at least 60 years old.

At this point very few knew about it. Only my parents and my girl friend (now my wife) had any idea. GF (now DW) was in grad school and I was a researcher and so we both lived like grad students. I don’t remember ever having felt the pressure to “upgrade” our lifestyle to keep up other than indirectly e.g. by comparing our spending patterns to those of our colleagues. When colleagues discussed salaries and mortgage payments I could only smile sympathetically. It was hard to relate empathetically. In fact, it is still quite hard to relate. Over the years, we have accumulated a bunch of good “stuff”. On the surface, the interior of our home looks like the home of most other overly educated academics I know. Not particularly tastefully decorated, but full of books and papers stacked on top of each other. The main difference is that when we have a problem, the first impulse is not to run out and buy something. Usually it means figuring out another solution that does not involve money. I have gotten pretty good at fixing things or improvising.

Oh yeah, I should probably mention that we live in an 34′ RV, but don’t let that fool you. It is not uncomfortable—people spend a lot of money to go on vacation in these—and it is not deprivation. We pay $475/month in rent or $5700 a year. With a 4% discount rate, that comes to $142,500 which means that buying a house which costs less than, say $80,000, in cash of course, would actually cost less and allow for generous spending on taxes and maintenance (much of which I could do myself). Unfortunately, such houses do not currently exist where we live having arrived late to the housing bubble. We would have to move into a house that we bought in cash and we probably will eventually.

Now, I know that comfort is commonly confused with being surrounded by stuff just as lifestyle is often measured in spending. I have come to realize that neither of these misconceptions are true. Lifestyle is simply a question of what you do, how you do it, and why you do it. For instance, I practice martial arts three times a week, I crew on yacht race out of the Berkeley marina, I fix bikes for a woman’s shelter, I read 3+ books a week, I don’t have an alarm clock, I have this blog of mine, and I don’t work for money. In general, I do what I want, when I want, within reason. Other lifestyles may involve spending 60 hours a week away from home and working to maintain a big house with a lawn, 2 cars and spend money on vacations, services, and stuff. It is like comparing apples and oranges.

In addition, real comfort has more to do with living without stress. Yet, it has almost become a rite of passage to get into stressful situations by signing the mortgage for a 3 bathroom, 5 bedroom house, car payments, cell phone plans, 401k plans, 529 plans, furniture on no money down, and so on, to the point of worrying about becoming unemployed. This cannot be comfortable, and this is a lifestyle I don’t want it. I’d rather have the lifestyle of sitting on a paid off sofa instead of a $1400 sofa set that I have to make payments on for the next five years and consequently pay closer to $2000 for. It is easy to get trapped, because stress creeps up on people, much like a frog in a pot of water, which is slowly heating. Consumers sign up for more and more and since the reference level (water temperature) keeps changing it is hard to realize how bad things have gotten before it is too late. I was lucky enough to escape that trap.

Another trap, which I barely escaped, is the idea of finding a career one is passionate about. I used to be passionate about my work. Being passionate is much like burning the candle brighter and being really passionate means burning it at both ends. You often see people fresh out of school or with no more than a couple of years of (life-)experience boldly claiming that even if they did not get paid they love what they’re doing and they’d happily do it for the rest of their life. It is probably fair to mention that a few are lucky enough to remain in this stage for the rest of the life. I used to be like that and I also used to think I was one of the lucky ones. I used to come in during weekends because I couldn’t wait for Monday.

A common idea is that if you love your work, what’s to keep you from spending, since you’re going to go to work happily ever after? In general, the more passionate you are, the higher the risk of burnout. (Doing your job merely because you are good at it without loving it is a much safer proposition!) Passion typically means working hard because you believe in your work. A burnout is, therefore, the working equivalent of losing faith. One day, or perhaps slowly, the flame just starts dying away. After more than a decade of passionate work, I began to lose my passion. I no longer came in on weekends. I was no longer excited to go to conferences. I no longer spent every waking moment thinking about my work. At that point I knew it was time to start looking for something else. I was lucky to be financially free and having the option to do what I wanted. After much consideration, I retired financially independent at 33. Having spent 100 hours a week like many other young researchers, I did not have the fire any longer. That was one year ago. I was also lucky in that I did not get into debt to pay for my education. In Denmark, all students who get admitted into the university system, far fewer than which get in in the US, get a stipend. (As far as I understand, good students in the US get scholarships as well.)

In all this, I made some mistakes and in retrospect I would have done a few things differently. This is perhaps forgivable given that practically all publicly available advice is directed towards going to college to study whatever, having a career, buying a house and a minivan, investing in index funds, and working for 40 years to live an effective middle class/consumer life. Given my goals I had to create most things from scratch. If I had to do it all over, I could have done some things better. Learning how to be frugal before going cold turkey on myself would have taken the sting out of the first year—after that I never felt like I was missing something.

I think first, I would not have pursued an education which did not have a strongly marketable skill component (unlike accounting, engineering, medicine, etc.). A good sign that your education doesn’t have one is an inability to answer the question: “So what are you going to do when you graduate?”. Fortunately, I made it work, but it would have been much easier to go to a trade school and learn a marketable skill and then consider my education an exercise in personal edification which could have been had with a public library card.

Second, I would have paid more attention to personal finance and in particular investing. The only thing worse than not having an investment plan is to have the wrong investment plan. Before I retired and starting living off of my money, my investment portfolio was not set up for income. Changing it was a big hassle. It is better to set it up right from the start.

Beyond those two mistakes, I did most things right. I never got a mortgage. I never got into debt and so I wasted nothing on interest. I always lived close to work to save on transportation costs. And I never spent money on anything that did not having lasting value and thus when put in perspective my stuff cost me very little. Finally, I happily ignored the common advice consumption smoothing, that is, “fake it until you make it” and avoided going into debt to boost my spending before I had the corresponding savings. I consistently saved 75% and eventually close to 90% as I got a real job before I retired.

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Daily Yakezie Short Carnival

How to Avoid Living Paycheck to Paycheck
by BarbaraFriedbergPersonalFinance

If Death is Simple, Why is Life Insurance Complicated?
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Do The Rich Pay Their Fair Share Of Taxes
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These posts have been chosen as one of their best post by the bloggers who submitted them or hand selected. Please check out each of them and let me know what you think!

Early Retirement Extreme - Jacob's Story

The personal finance blogoshere is filled with amazing writing talent, tremendously smart people that dedicate their time and energy to provide something of value to others. Of them all however, today’s guest post writer has challenged my thinking about efficiency, frugality and money management more than others. His extreme approach is not for everyone, but everyone can learn valuable lessons from Jacob; owner and writer of Early Retirement Extreme. It is an honor to share part I of Jacobs story.

My story began when I 24 years old and had just moved to Switzerland to begin graduate studies. I had just gotten my masters and received a bunch of papers about union representation, retirement plans, career negotition, etc. which I promptly ignored because I did not figure such thing concerned me. I knew very little about money. Money was essentially something I saved and after I had saved it, I spent it, typically on some electronic gadget. In fact I had a long history of gadgets that would entertain me for a few months afterwhich I would buy another one. I did realize that I was “growing up” but I really did not have any specific plans for the future other than getting a PhD. I heard something about the importance of starting a retirement account before I was 30, but that was about it.

I don’t know how, but at some point shortly after buying a new computer with a humongous screen for about $2500 (I’ll convert to USD to make things easy), I read an article about the credit based monetary system—at this time I had found a dorm room about 10 minutes by foot from my office because it was highly convenient and I did not want to be socially isolated in my own apartment in a new country—specifically I suspect it was an article from some subversive website which didn’t think too highly of the banking system.

Hence, right around my 25th birthday, I came to the understanding that mortgage debt was not a good debt. It was the worst possible debt I could imagine. Figure 6\% over 30 years and it meant paying for one’s home twice over, once for the actually house and once for the cumulative interest. Even worse, if one did not keeping working for the next 30 years, the home would be lost. And was it really fair that some banker could sit and collect money without working? Maybe so, but no banker was going to collect my money, so I decided to save enough money to buy my first home in cash.

From this point on I found another outlets for my money. Rather than trying to build the best gaming computer possible, I would be saving to buy a house in cash. Of course, when you’re on a grad student salary (about $19000 a year or so, so it is not exactly challenging to make more than that even with just a GED, hint, become a truck driver) and saving for a house, it can seem pretty far off. I think frugality is in my genes having always been fairly tight with my money when it came to things that did not mean anything to me—for instance, I spent half a year walking 10km roundtrip each day to school rather than paying $100/month for a bus pass. On the other hand I spent $150 for a pair of silver cables to connect my CD player to my preamp—but I started spending lots of time reading frugality websites. This was back in 2001 so there weren’t any blogs around. (I did not really learn of the existing of blogs until 2006/07.) At the same time I got interested in sustainability and resource use. I began to see that this idea of buying stuff merely to replace it with the latest model some time later was slightly insane, to put it mildly. In fact, I began to understand how the entire world, including myself, was addicted to consumption. I went cold turkey.

Initially, I was clueless. My meals were alright but kinda boring and now they became even more boring, but eventually I learned to cook them well and expand a bit on the selection. I stopped buying books. Since I loved reading, I went online and started reading news and forums instead. The modern equivalent is probably blogging. I stopped buying stuff. In the beginning my life became boring. However, after a few months of withdrawal, I watched my account grow. It was weird suddenly having $5000 in the account, the equivalent of two big gadgets. I had never had so much money before. I found that the potential ability to buy things gave the same pleasure as actually buying them. I remember walking past a car dealer on the way to the supermarket and noting to myself: “Hey, I could buy that car in cash.” (In Europe cars are a good deal more expensive than in the US.). Several months later, I noted that not only could I buy one car. I could buy two cars. I have found this to be a very strong motivator and a way to really put things in perspective. $20,000 may seem abstract, but walk past a car lot and note that “I could by this one, this one, and that one”, that “registers”. I also noted that my desire to buy stuff has severely decreased. It had become as uncomfortable to buy superfluous stuff as it had been not to buy it the year before. It became a game to see how long I could make things last. I darned my socks. Any seam that wasn’t visible and could be fixed was fixed. I wore out a bedsheet in the middle. I wore out the one towel I had in four years. My monthly expenses came to about $275 for rent, $85 for health insurance, $115 for food (food in Switzerland is very expensive!) and not much else. I was saving over 75% of my income.

Somewhat later I began to calculate how much money I had in terms of expenses. I noted to myself that I had enough money to survive for more than 8 years if I suddenly lost my job. That somehow made any issues about finding a job after graduation easier to deal with. Later I learned that this is called an emergency fund and that most people only hold 6 months of reserve. Today, my “emergency fund” (or invested equivalent) is close to 500 months (about 40 years)!

I do not know exactly when I realized that the possibility of having my money work for me rather than working for my money became an option. All along I had calculated the interest rate of my savings in the form of an hourly rate. I would take, say, $50,000 in savings and multiply it by 3% to get $1,500 per year and divide it by the 2000 annual hours of the standard work year to get $0.75 per hour. When I had $100,000 saved, I would do the same and get $1.50 per hour, and so on. I would start comparing this to actual salaries of say $12,000 a year, where $1.50 per hour corresponds to 3 months of full time work on minimum wage. I would explain that my money was the equivalent of having a sales assistant working for me full time part of the year. People who work for living never appreciate this example. It is harsh, but it is true and everybody gets the point.                  j

I began to see myself as a poor aristocrat or a rentier—more accurately, I had values more representative of those classes than the working class or the middle class. My clothes were either bought in thrift stores or several years old and mended. I had a certain eye for quality, specifically, I bought things either used or I bought the best of the best so I would never fall for the allure of “upgrading” and I spent most of my time engaged in theoretical research and not caring much for bling, so the idea of having a “refined” taste and using things with patina while having a low level of expenses and virtual people working for me somehow validated my choices. Maybe this was a coping strategy being surrounded by consumers, who were busy converting their hard work into stuff, I don’t really know. However, is it really illusion? Was I not becoming a capitalist in the true sense of the word? Could I not become the very banker I did not want to give my money to in the beginning of the story?

At this point I did not have any investments at all. All my money was residing in savings accounts. I did not have any retirement accounts either given the contractual and global orientation of academic research. It should probably be noted that many people of science have a snobby attitude towards business and investment as these fields are seen as somehow being baser and easier than the lofty science of the ivory towers. This was somewhat of a barrier to overcome.

However, I realized that increasing my rate of return from 3% to 5% would make a rather big difference in my asset income: Going from 3% to 5% is an increase of 66%. I started reading all I could about investing and slowly started transferring money from my savings to investments. I have tried various strategies but eventually ended up with a strategy based on mostly on large and midcap dividend stocks. To avoid too much hassle this is the strategy I recommend for anyone wanting to have their money work for them. The money stream is fairly predictable and I sleep better at night because the dividends keep coming even when the market is crashing, but I digress.

Whenever I was daydreaming, I was running mental calculations calculating passive income. At the same time I continued my way of life: Not falling into the housing trap. Living close enough to work to run over and check my calculations in less than 30 minutes, specifically not owning a car, and generally not spending money unless it concerned something I really needed and in that case buying the best I could find. I have a $50 lighter, $100 gloves, $200 day pack, and so on. However, in annual costs, having these is much cheaper than having to replace the “regular” stuff every year. My possessions were still limited to a couple of suitcases. Owning more makes it a real hassle to move. Moving every other year for the past several years I had learned my lesson. Too much stuff is a serious hassle. This also means that since I have only one lighter and not five, say, even paying that much turns out to be not that much at all. Also, after a while one ends up with a collection of pretty good stuff. Another thing I liked to do was instead of buying souvenirs, I would buy things I would actually use instead. I bought my Swiss Army Knife in Switzerland and my pocket flashlight in Hamburg. Also, if there was a question of buying something where I was not certain I was not going to use it at least once a month, I simply would not buy it but try to improvise a solution instead.

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Daily Yakezie Short Carnival

Interest Rate Mania: Where is the Housing Market Going?
by Invest it Wisely

Save Money On Your Cellphone Bill
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Your Guide To Income Based Repayment
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These posts have been chosen as one of their best post by the bloggers who submitted them or hand selected. Please check out each of them and let me know what you think!

THE HEALTH RISKS OF DEBT STRESS

A guest post by Joe Plemon, owner and writer at Personal Finance by the Book. Joe is a financial coach and great blog writer. He also deserves a tremendous amount of praise for successfully raising 4 kids! Please sign up for his RSS feed for more great articles from Joe.

4003446559_2326c2609eThink twice before you sign the papers on that new car loan.  It could kill you and I am not talking about a traffic accident.  An Associated Press survey links debt stress to such health issues as ulcers, headaches, anxiety, depression and heart attacks.  And the problem is growing: there is a 14 percent increase in debt stress in the past four years.

Of those reporting high stress from debt, 27% had ulcers or digestive tract problems, 44% had migraines, 29% suffered severe anxiety, 23% had severe depression and 6% reported heart attacks.  The heart attack rate is double those with low debt stress; the other illnesses are worse: 3-7 times those with low debt stress.

Although these statistics should not surprise us, many people do not see the connection: higher debt brings on higher stress. We somehow have fooled ourselves into believing that the “good life” consists of driving the newest car, wearing designer clothing, eating out at the chic restaurants and taking posh vacations.  And we do it all on credit,  telling ourselves it is OK if we can just make that monthly payment.  But this “good life” is a mirage: it is ruining our health.

A truly good life is always living on less than you make.  It is paying cash for your purchases and planning for your future.  It is a life of peace and contentment.  It is a life of low stress and solid relationships and great marriages.

Suppose you currently have $20,000 in consumer debt and you buy a shiny new car.  With that new car smell comes twice the debt and twice the stress.  If, instead, you applied that new car payment to your debt, you should be debt free in less than two years.

So here is the choice: sacrifice your lifestyle and save your health or save your lifestyle and sacrifice your health.  Your stuff or your health.  Which will you choose?

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photo by blw photography


Daily Yakezie Short Carnival

Our Debt Checkup
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Expected Value
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Opt Out of PreScreen Credit and Insurance Offers
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These posts have been chosen as one of their best post by the bloggers who submitted them or hand selected. Please check out each of them and let me know what you think!

Management Rewired by Charles S. Jacobs

money, mind, habits, knowledgeEvery once in a while you come across a new thought, concept, or perception that will radically change your perspective on a subject, if you allow it. Management Rewired – Why Feedback Doesn’t Work and Other Surprising Lessons from the Latest Brain Science has done that for me.

If you supervise people in any capacity, company owners, managers, and even parents you should read this book. If you don’t supervise but you want to better understand people, how they think and what motivates them, you should read this book.

The author pulls together the latest research in neuroscience to show us how the mind really works. Much of this is done with fMRI brain scans. While people are in these machines they are asked to perform a variety of tasks, answer questions and complete puzzles. By mapping the activity levels in various parts of the brain they have developed a much better understanding of how our minds actually work.

Everything that we are and understand, our knowledge, emotions and memories are no more than very tiny electrical impulses flowing through a series of interconnected synapses. Each experience we have builds a certain pattern of these network paths. The more often we repeat an experience the more credible each set of network paths become. Our knowledge, memory or skill associated with these new paths improves and strengthens.

Each of us experiences the world through our own eyes and as a result we each have a different perspective. Through millions of experiences, each of us has constructed our own very unique view of the world and how it works. The author uses the analogy of a movie running in our head, each custom made.

As a result of these unique perspectives, tension, disagreements and misunderstandings occur regularly. What makes logical sense to you, based on everything you know, may be complete nonsense to another simply because they lack some unique experience and therefore the synaptic pathways that tell them it is logical.

More and more the science is showing that everything we thought we knew and understood about motivation may be wrong. Contrary to our perception, providing extrinsic motivators such as bonuses, gifts and rewards or even punishments for undesirable behavior may often be detrimental to our long-term objectives.

There are more effective and efficient methods to motivate and manage, the author shares, but many of these methods are counter intuitive and challenging to implement. The research provided indicates that the greatest levels of engagement and performance will likely come only after a manager dismisses many of the common management methods in use today.

Instead of setting objectives for employees (kids?) you should have them set their own. Instead of praising or critiquing your subordinate, you should ask them to critique their own. When their performance falters, let them determine how to improve. Charles Jacobs writes:

When they are the ones responsible for their performance, the psychological dynamic of the relationship works for the manager, because the employee’s self-esteem is positively correlated with their performance and the success of any corrective action.

Fascinating!

I cannot begin to cover the depth, breadth and complexity of the concepts that this author so seamlessly pulled together and then presented in simple English. While he expertly introduces complex medical and psychological concepts he educates and enlightens the reader not only on how to better manage others, but also how to better manage yourself.

Readers: Have you been exposed to Daniel Pink or Dan Ariely? If not, these two also shed new light on how the mind works, what motivates, how we make decisions us and how we can benefit. If you watch these two or read Management Rewired, please come back and let us know what you think!

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photo by brain blogger


Daily Yakezie Short Carnival

Explaining The Tax Brackets
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These posts have been chosen as one of their best post by the bloggers who submitted them or hand selected. Please check out each of them and let me know what you think!

Dave Ramsey Was Wrong!

826496404_f043f5b5d9…But My Refrigerator Works!

Spend more than a few minutes in the personal finance blogs and you will find many who worship Dave Ramsey’s financial advice. Dave also has his share of critics that will debate his key concepts.

However, I can personally tell you that in one respect Dave is absolutely, positively wrong.

If you are a follower of Dave, read any of his books or even if you just see him occasionally you have probably heard him preach of the need for an emergency fund.

He promotes the use of an emergency fund for a number of reasons. I think most of all; Dave wants his followers to learn the habit of saving and focusing on savings. There are other benefits as well. But if you know Dave, you also know that he often refers to “Mr. Murphy.” Dave tells his listeners that when we have an emergency fund “a funny thing happens… Murphy stays away.”

NOT!

I’ve been a good boy. I continue my education with all things financial. Our spending has been reigned in, we live on less than we earn. We have paid off all debt with the exception of the house and we have set up college funds for the kids and contribute to a variety of retirement and investment funds. Most of all, we have an emergency fund!

But Murphy is kicking my tail!

Not long I wrote about my ordeal with the A/C. Now it is the refrigerator. Here is the series of events.

  • Two weeks ago – The wife thinks we left the freezer door ajar. Everything is melted.
  • One week ago – The refrigerator is not cooling but the freezer is working fine. The evaporator is a frozen block. I defrost it overnight and plug it back in.
  • Four days ago – The fridge is not cooling again, the evaporator is frozen again.

It would appear Murphy does not shy away from emergency funds, he want shis share!

With an overwhelming schedule at the moment and being a little gun shy of appliance repair companies, I seized on another opportunity to address this problem. Actually my son seized on the opportunity to make a little extra cash!

My fourteen year old son has his eye on a new laptop. I have a refrigerator that needs to be repaired….

No, he will not get a laptop for fixing the fridge! However, assuming he could save me the repair bill, we did agree to compensate him at a rate relative (but discounted) to the retail cost.

It is important to understand that our son, for all his wonderful qualities, intelligence and strong character traits, has virtually zero mechanical experience and not much more skill. He has never been one to take toys apart and could not care less how things work, so fixing a refrigerator would be a stretch to say the least.

Admittedly, I ended up helping a little. He needed silly things like to learning basic tools and how to use extensions. I also helped him to identify the major components and lastly I removed the ice-maker. Beyond this, he Googled, researched and directed the diagnostic and repair process. He removed parts and pieces, learned how to test electrical components with an ohm meter and fixed our refrigerator. Total cost: $35 in parts. We needed a new defrost timer. The final repair took two screws and a plug to replace the part.

What did I learn through this experience? Surprisingly, it wasn’t about money.

Don’t Underestimate –

You will be surprised what people are capable of if only you believe they are capable. Encourage your kids, your friends and your employees try new things whatever they may be. If they have an interest, they likely have the ability.

The same applies to us. We don’t believe we are capable of repairing an appliance, starting a business or completing a challenging task so we never try. Instead we pay someone else to do things we can do for ourselves.

Murphy will follow us regardless of our path. With or without an emergency fund, unexpected expenses will crop up. We can blindly pay to make Murphy go away or we can fight back. Only your willingness to take on these challenges yourself will save you in the end.

btw… Thank you son!

If you like to be challenged to see things with a fresh perspective, if you like to learn new ideas and different concepts, sign up for my RSS feed or enter your email address here to receive updates directly to your in-box.

photo by G&A Sattler


Daily Yakezie Short Carnival

Blogs as passive income, no way!
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MBA Course: Investing & Portfolio Management-Class 1
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The Emergency Credit Card
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These posts have been chosen as one of their best post by the bloggers who submitted them or hand selected. Please check out each of them and let me know what you think!