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.

Budget Planning: How to Budget

For many people, a budget is a strange and terrifying thing. They fear that a budget will suck all the fun out of life, telling them what they can spend money on and when, and will lead to nothing but family fights.

However, if done properly, a budget is actually a key tool on the path to financial freedom. Rather than being a constricting document, it frees you from worrying about what you can afford and how much money you’re going to have left each month. You no longer have to worry about whether you’ll have sufficient funds remaining to pay your bills, because every dollar is allocated before the beginning of the month.

This doesn’t mean removing all spontaneity and just for fun spending; it just means that you factor it in. For example, suppose that your after tax salary is $2000 per month. (We’ll assume this is also after contributing enough to your 401(k), if available, to get the maximum amount of matching funds). Your budget might look something like this:

Rent $800
Utilities $250
Insurance: $150
Car Payment $200
Savings $250
Gas: $50
Food: $200
Blow: $100

As you can see, a budget doesn’t have to be particularly complicated. You have each area scheduled, including “blow”, which is money that you can spend on anything you want, whenever you want, without feeling guilty. Want to go to a movie or pick up a new video game? You can – you’ve budgeted for it!

Notice that savings are part of your budget; this is very important, as money that isn’t budgeted will, almost inevitably, end up getting spent by the end of the month! When you first start using a budget, your savings should probably go towards an emergency fund so that you have cash available if you need it; once that fund is built up ($1000 is a good number), it can go towards paying off debt instead. For the most part, paying down debt is the same as saving (and pays a better interest rate to boot!) but you want to make sure you have some money available for emergencies.

Of course, budgeting can be slightly more complicated when more than one person is involved, as you’re likely to have some disagreements on exactly what should be cut if you need to reduce some of your spending, but that’s still a lot better than not having a budget and not knowing where your money is going! Start by making a list of all of your current spending, classify it, and then talk about whether you need to cut down on spending and by how much. This doesn’t have to be painful; for example, if you spend too much on eating out, you could change that by learning to cook together. The important thing here is to track all of your spending for at least a month so that you have an accurate idea of how much is actually being spent on each activity; to improve something, you first need to measure it.

Return on Invested Capital (ROIC)

Return on invested capital, or ROIC, is used to measure the historical performance of a company. It is a lagging indicator, which means that it gives information on how a company has performed in the past rather than how it will perform in the future; however, it is not as easy to manipulate as many leading indicators such as discounted cash flow.

ROIC can be calculated simply as net income after taxes (that is, after tax earnings), divided by invested capital. A high number indicates that the company is using its invested capital efficiently, which suggests that it is likely to continue to grow. However, this is by no means a fullproof measure; for example, it is possible that the return came from one-time events rather than ongoing operations.

Retirement Millionaire

How would you like to be a millionaire when you retire? Silly question, right – who wouldn’t? But when you think about it, if you’re a long way from retirement, you’re actually going to need to plan on having quite a bit more than a million dollars, for three reasons. The first is inflation: a million bucks won’t be worth anywhere near as much as it is now! The second is longevity; people are living much longer these days (and presumably will be living even longer in the future), so the retirement nest egg needs to last for a long time. The third is quality of life; if you’re not working, you’ll presumably want to do other things, and doing things generally costs money!

Suppose you decide that you should be able to live well on $100,000 per year in today’s dollars, and that you plan to retire in 30 years. At 2% annual inflation, you’ll need to receive $181,136 per year at the start of retirement, and that will increase each year thereafter. To reach this goal, you have two choices: you can invest in an annuity or build up a sufficient nest egg to provide for that amount. Let’s consider what it will take to reach the former.

Suppose that you’re going to invest in stocks returning an average of 10% per year until you retire, and then switch to a more conservative mix returning 5% per year. (Of course, you would really start getting more conservative as you approach retirement, but we’ll do it this way to keep the math easy). If you withdraw 4% of your nest egg each year, it will keep growing and you can live off of it indefinitely. So you’ll need to save up  $181,136 x 25 = $4,528,400 – a bit more than a million! As it happens, you’d need to save about two thousand dollars per month to reach this goal.

That sounds like an awful lot of money, doesn’t it? $24,000 per year. Of course, if you only need $50,000 in today’s dollars to live on (a more realistic estimate for most people, considering that you should have your house paid off and no debt), then you’ll only need half as much money and can do it by saving just one thousand dollars per month. Still a lot, but if you and your spouse are making a combined $60,000 (which is less than the $50k you want after you deduct work expenses), that’s 20% of your salary..tough, but hopefully not undoable.

Good luck!

Average Retirement Age

You may have heard that one of the reasons that Social Security is starting to have trouble is that, back in the 1930s when the program was started, not all that many people lived to be 65! Over the decades, the average lifespan has gone up much faster than the retirement age; as of this writing, while reduced Social Security benefits are available from age 62, the retirement age to collect full benefits is gradually increasing (by 2 months per year) from 65 to 67, and it has been proposed that this should increase further.

But forget full retirement age for a moment; what’s the average retirement age? According to the US Census Bureau, in the US the average retirement age is 62 (and this has been decreasing) and the average length of retirement is 18 years (and this has been increasing). What does this mean? We’re retiring earlier, and living for longer. That makes it even more important to start planning and saving now, as we have ever-fewer years to save ever-more money for retirement. However, note that just because the average retirement age is 62 doesn’t mean you’re required to retire then – every extra year you work is quite a bit more than a year longer you can live without running out of money. You may want to have as many retirement years as possible, but isn’t it better to be financially secure and ready to enjoy them?

Financial Freedom

What does financial freedom mean to you? For many people, it means getting out of debt. For others, it means having enough money to retire. Still others think that financial freedom means owning a nice home and having enough money to eat out every night. What does it mean to you?

I define financial freedom as meaning that you no longer need to worry about money; in other words, you have a large enough nest egg (or sufficient passive income) that you can pay your bills for the foreseeable future without needing to work. Jobs can disappear at any time; freedom is forever.

So what are the steps to becoming financially fee? First, obviously, is to get out of debt!

The rich rules over the poor, and the borrower is the slave of the lender.
Prov. 22:7

Debt can be an effective financial tool; by leveraging the money you already have, you can create wealth more quickly than you could otherwise. Unfortunately, in today’s society most debt is taken out not to create wealth or to survive, but for convenience. We want what we don’t have, and we don’t want to wait or work for it. Thus, the magic piece of plastic makes the wait go away! To become finally free, you must rid yourself of debt; you must be saving for the future rather than paying for the past.

Second, of course, is to build a nest egg. When I retire, I don’t want to have the same standard of living as I do now, or worse; I want to travel the world and do whatever I like! With compound interest, it’s easy to save now and play later. Ok, that’s not quite true – saving is never easy, at least until you get into the habit! I recently calculated that if I were to accumulate $300,000 in retirement savings by the time I turn 40, I’d have the retirement fund I need ($3 million) when I reach 65 without ever saving another dime. Ten years earlier, I’d need only a third as much for the same result!

These days, we spend entirely too much time worrying about money when we should be enjoying life. The key to reaching financial peace, financial freedom, is to simplify, avoid buying what we don’t need, avoid going into debt, and save for the future. Revolutionary? No. Surprising? No. Effective? Yes.

Debt Snowballs

When paying down debt, one thing that many people find helpful is a debt snowball; this is actually a central element in the popular financial management plan by Dave Ramsey.

The debt snowball is a simple concept: you make minimum payments on all of your credit cards, except for the one with the lowest balance. That card, you pay as much as possible towards each month until it’s paid off. You then take the money that you were putting towards payments on that card and put it towards the card with the second lowest balance, and so on, until you have no balance remaining. Once a card is paid off, it’s put away and no longer used.

From a strictly mathematical standpoint, this is silly: you pay the least by putting your money towards the card with the highest interest rate. From a psychological standpoint, however, it can be very effective as you gain a sense of accomplishment from seeing your debts disappear; the satisfaction of having fewer bills makes it easier to keep on saving, whereas putting money towards a card with a higher interest rate but also a higher balance can mean that it takes longer before you can really see the difference your actions are making. Additionally, every time you pay off a card you get to write a bigger check towards the next one!

Of course, once you’ve paid off all of your credit cards, since you’re in the habit of saving it should be simple enough to redirect the money you were putting towards the credit cards into retirement savings or to pay off a mortgage. Then you’re well on your way to financial independence!

Funny Retirement Wishes

Don’t know what to do with the retired person in your life? Here are a few quotes and sayings about retirement.

When a man retires and time is no longer a matter of urgent importance, his colleagues generally present him with a watch.
– R.C. Sherriff

You’re only young once but you can be immature all of your life.
–Charles Scoggins

When I die, I want to go peacefully like my grandfather did.
In his sleep.
Not yelling and screaming like the passengers in his car.

The best time to start thinking about your retirement is before your boss does.
—Unknown

Retirement is wonderful. It’s doing nothing without worrying about getting caught at it.
—Gene Perret

The trouble with retirement is that you never get a day off.
—Abe Lemons

When a man retires, his wife gets twice the husband but only half the income.
—Chi Chi Rodriguez

Retirement Planning for Women

Why should retirement planning be any different for women than for men? For the most part, it isn’t; however, because women generally make less and live longer than men, they need to save a higher percentage of their income in order to be sure of having sufficient funds available for retirement. Additionally, they’re more likely to work in part-time positions that don’t offer access to retirement plans.

An additional issue is that women often invest more conservatively when they’re young, when they should be investing aggressively to build the nest egg they’ll need in later years.  Additionally, many employer-sponsored plans require that you work for a certain number of years to become fully vested; leaving the workforce at the wrong time to take care of children can thus wreak havoc on your financial plans.

Some of the problem can be alleviated simply by choosing a job that provides a good retirement plan, and spending more time working, particularly when you’re making a high salary; working longer before retirement is generally a good idea, as you put off when you’ll need to start withdrawing from your retirement account, allow the money in it to grow longer, and contribute more when you’re at (presumably) your highest salary.

If you’re married, you should be aware of how much of your husband’s benefits you’ll be entitled to, should you outlive him. You can calculate the social security benefits you’ll be entitled to based on both your and your husband’s contributions at the official Social Security website.

Additionally, if you’re not currently working and your husband is, you may be eligible to make a spousal IRA contribution; this allows you to contribute to your husband’s traditional or Roth IRA, increasing the amount you can invest in the retirement shelter. To qualify for this, you must be married (obviously!), file a joint federal income tax return, and have taxable compensation at least equal to the amount you wish to contribute.

Do You Need a Debt Settlement Attorney?

If you’ve decided to try debt negotiation, one big question remains: should you attempt to handle it yourself, or hire a debt settlement attorney? And if you do hire one, exactly what will he do for you?

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