Tired of getting told that Instagram is a waste of your time? That makes two of us! The other day, it occurred to me that probably the best way to explain some complicated finance equations is Instagram! So not only is Instagram a good way to procrastinate, now, whenever someone claims that you’re wasting your time on the app, you can let them know that it is useful for your “financial literacy.”
Below are a few ways to understand basic finance equations using Instagram.
This is pretty simple and is basically what you own minus what you owe.
Your net worth is a good measure of your financial health. Assuming that you understand how Instagram works, always think of your followers as your assets and your following as your liabilities. Ideally, most of us aim to have more followers than following, this is called positive equity. Think of it as having money left over every month after covering your expenses or as the money you have in your savings account, your car, your house, phone, or anything of value that you own.
Now take a look at this account.
Occasionally, you have accounts where someone is following more people than those that follow them. Imagine an account that has 500 followers and 1000 following (like the one above). Sometimes, if such an account requests to follow you, part of you is tempted to not accept the request, suspecting that it might be fake. When you have more following than followers, ie, more liabilities than assets, it is called negative equity. This is similar to when you overspend, your salary doesn’t cover your needs, you have credit card debt, your bank account is overdrawn, etc.
Just like how you sometimes clean up your Instagram by unfollowing some accounts that don’t add any value to you or that you find useless, there are plenty of ways to reduce your liabilities and build positive equity. More tips on how to do this in an upcoming post.
Return on Investment (ROI)
This is very easy to understand. ROI is basically the benefit (or return) of an investment divided by the cost of the investment. The result is expressed as a percentage.
Basically, your ROI is similar to your engagement rate, in other words, the amount of interaction your content generates or how many people like your photos / videos.
Well, there are two types of Instagram users, one that gets a gazillion likes consistently regardless of the content, and another that barely gets 11 likes… How shocking is it when you click on a person’s profile and see that despite having over 500 followers, they barely get 11 likes.
And then there are these types of accounts.
Since we have established that your followers are your assets, think of the number of likes your posts generate as the total return on your investment. A rule of thumb that I use for my social media account is to aim for an average 20% engagement. This might differ from person to person, let’s assume that 10% engagement is considered normal. That is, if you have 500 followers, 50 likes and up would be considered normal.
Similarly in finance, your assets should generate a certain return a month/year. Ask yourself, if you have $5000 in savings, how much return are you getting on that every year? Is your money sitting in a savings account that pays you 12 cents every three months, or did you try to invest it somewhere and watch it grow?
Just like how different content generates a different amount of likes, your RIO is different compared to the type of assets you have.
The number of likes on your photo / video is your net profit. Your net likes divided by your followers, otherwise known as your engagement rate, is your return on investment. Just like how you want a high number of likes that is in proportion to your followers.
Imagine you start out with 500 followers, and you get on average 50 likes per post. As time goes, you meet new people and now have 550 followers. Ideally, you want your engagement rate i.e. ROI to reflect this growth. Meaning that instead of 50 likes, you should be getting 55 likes or more.
Additionally, your content used to be mediocre because you had an iPhone 3 that took grainy photos or didn’t know that VSCO existed. However, you’ve upgraded your Instagram game and your account is now considered #goals. As a result of better quality content, more people now like your posts, leading to a higher engagement rate.
When you take the steady increase number of likes from having more followers and add the fact you get more likes because of better content, you’d expect the number of likes to be even more than 55. By this point, you feel like a solid 70 likes per post is not so far out of reach.
This is how compound interest works. Initially, you have savings which you earn interest on. After specified period, you earn interest not only on the total assets, but also on the previous interest as well. Every time you earn new interest, it is on your assets plus all the interest you’ve earned in the past.
Risks and Returns
Risks is basically the type of followers you have. Some are family members and old friends, others are crushes and people you admire. Normally, family will like and comment on all your pictures. But family likes aren’t exciting. Excitement comes from likes you get from friends and crushes. The younger you are, the more friends and crushes you have and the more you generate content that will get lots of likes.
Likes from family members aren’t as exciting, you don’t try as hard to get the perfect shot, but you still get a dependable amount of likes.
Everyone has a different risk tolerance, which determines the types of assets you should invest in. This is dependent on a number of factors such as your age, when you need money, etc. Assets that are the riskiest often pay a higher interest compared to their less risky counterpart. More information about different types of assets coming soon.
This one should be easy to understand. Diversification simply refers to the type of followers you have.
Do you only follow random celebrity and dog accounts (that barely like your posts), how many of your friends and family to you have? Some friends can be relied on to always like your posts and even leave a comment every once in a while. Others, like your crushes, will only like once in a blue moon.
Either way, it is important to have all these types of followers. Same concept for finance, you can’t have all your eggs in one basket and should always diversify your assets in order to maximize your potential return.