Plan ahead. Work hard. Retire young.
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  • How Facebook Makes Money

    If you've seen The Social Network (which is entertaining, if somewhat fictionalized), then you'll know that Mark Zuckerberg originally was strongly opposed to putting ads on Facebook. If you've used Facebook lately, you'll also know that that this is no longer the case - Facebook now serves up quite a few ads. So is advertising how Facebook makes money?

    Ads, ads, ads

    In a word...mostly. While ads don't make up all of Facebook's revenue, they're definitely responsible for the lion's share. In 2008, Facebook sold $300 million in advertising; that increased to $500 million in 2009 and more than tripled to $1.86 billion in 2010, of which 60 percent came from small companies. $740 million came from well-known brands including Coke, Proctor & Gamble, AT&T, and Match.com.

    While Facebook still lags behind Google, they have the advantage of offering very precise targeting. Users (well over half a billion of them) share a lot of information on Facebook: age, location, relationship status, sexual preference, education, employment, interests, religious views, political views, favorite music, favorite books... you get the idea. As a result, advertisers can now put their ads in front of the people most likely to be interested in them, making them more cost-effective. (As one example, my current employer is running Facebook ads to hire more people...a fact I'm aware of only because I fit the profile to see them!)

    Of course, Facebook ads don't have particularly high clickthrough rates - people who use social media sites tend to be more tech-savvy than most, and either use an ad blocker or just ignore the advertising, resulting in an average clickthrough rate of only about a twentieth of a percent - but when you're serving a couple of billion ads per day, it still adds up pretty quickly!

    However, advertising doesn't tell the whole story. How else does Facebook make money?

    Facebook Gifts

    We've all seen the notices - your friend's birthday is this week! Send a virtual gift for only a dollar!  The Facebook gift shop is gone now - which surprised a number of people, considering that it brought in around $75 million in 2009 -but there are still a number of third party apps that offer similar functionality, and of course Facebook takes a cut. Like Apple's app store, 99 cents apiece for virtual items adds up really fast when people are buying millions of them! Of course, even before Facebook, there was a thriving business in virtual items as people sold in-game goodies on Ebay. Which brings us to..

    Credits

    The big new thing for Facebook these days is their virtual currency, which you can use to buy things inside games and other apps. Want to level up faster in that game, or maybe buy a shiny new trinket that's just fancier than the free one? Facebook will take 30% of that purchase. By promoting credits, of course, they encourage you to spend even more time on the site (after all, you now have money invested in the games, as well as time), which means you'll see even more advertising and be tempted to join in on even more activities that require credits.

    If You Built It, They Will Come

    At heart, Facebook's strategy is simple: build an addictive social platform, get tons of users, and then figure out how to monetize it. At the start, the gimmick was exclusivity: only students at particular universities were allowed in. Now, with the service open to everyone over 13, the main reason to join Facebook is simple: it's where all your friends are. Facebook, then, needs to ensure that this continues to be true - that their platform remains the easiest way to stay connected with the majority of the people you know. As long as they can do that, the money will follow.

  • Bad Idea #1: Cashing Out a 401(k) to Pay Off Debt

    These days, a lot of people are working to pay down debt, which is a great idea; few things are more stressful than owing money, so paying off your debts not only helps you to have a better retirement, it can have positive benefits on your health right now.

    Still, that doesn't mean that paying down debt is always the best option. One particularly bad idea is to cash out a 401(k) plan to pay off your debt.

    Why is that a bad idea? Here are the three biggest reasons:

    1) The money is supposed to be for retirement! If you pull it out now, it may look like a smart move - after all, you're probably paying more interest on your credit card than you're making on your retirement plan - but it's a lot easier to ignore your retirement account being too small than your debt being too big (at least until you get close to retirement!) You should make a practice of never touching your retirement funds if it's at all possible; once the money is in there, it's off limits.

    2) The government will even help enforce that practice; if you haven't reached retirement age and you try to take money out of your retirement account, you're going to face some hefty penalties and interest (with the exception of principle on a Roth IRA, of course). Just by taking the money out of your account, you could end up losing a third of it immediately, before it even has a chance to do you any good.

    3) Retirement funds (up to a certain limit) are exempt from bankruptcy. If your debt gets the better of you and you're forced to declare bankruptcy, you can shed the debt and keep the retirement funds. As such, even when things feel hopeless, it's still best to leave the money in your 401(k) alone if at all possible.

    Of course, sometimes there really is an emergency - most likely medical - that completely justifies pulling the money out; in this case, you may even be able to avoid the early withdrawal penalties. However, consider your options carefully; not having adequate retirement savings is always a bad idea!