How to Control Your Facebook Privacy Settings
Ads, Apps, and Websites
Description: This section controls how your Facebook profile and personal information interact with things outside Facebook proper, including Facebook apps, personalized ads, and websites that use Facebook data to customize your experience. It's also where the truly Orwellian stuff lives; if you're worried about Facebook destroying your privacy, head here first and turn pretty much everything off.
Notable settings: Everything here is worth scrutinizing, especially the 'Apps you use' control panel. Here you can review and remove all of the third-party apps you've added to Facebook. Be warned, however, that you must remove (and confirm removal) of each app separately, unless you elect to delete them all, so the operation may take a while to complete. In the Ads settings, you can turn off social ads and preemptively opt out of having your data used in third-party advertising. This section also lets you turn off Facebook "features" such as instant personalization (which exports your personal data to partner websites) and public search (which allows users whom you haven't friended to see your timeline through search engines, even if you've set your Timeline to be visible to friends only).
Limit the Audience for Past Posts
Description: This section is an anomaly on the Privacy Control page. Instead of popping up a new window of settings, Limit the Audience for Past Posts generates a small pop-up box with text explaining that, when you confirm that you want to limit the audience for your past posts, Facebook will automatically set all posts in your timeline to be visible only to friends. This will retroactively change the status of your previously public timeline posts to friends-only.
Notable settings: The Limit Old Posts option is the only setting here (besides Cancel), but it's a doozy. Facebook frames it as a kind of nuclear option, but for most people it's a convenient timesaver. Unless you prefer to leave most of your timeline public, activating this option and manually making a few posts public should take much less time than managing the privacy settings for Timeline posts individually.
Blocked People and Apps
Description: The Manage Blocking settings let you selectively block Facebook apps and users from interacting with you. They range from relatively benign settings that help deter an overzealous aunt from inviting you to try Farmville (without offending anyone) to a full global block to prevent abusive users from interacting with you in any way on Facebook. These settings are unlikley to be of much use for you when you first establish your privacy settings, but they may become more useful when friends or apps start spamming your Facebook feed.
Notable settings: The 'Block users' setting is a fantastic tool if you're being harassed on Facebook and want to take care of the situation yourself. Preventing all interactions with a threatening person through Facebook is easy (be sure to report the harassment to Facebook as well); for most users, though, the less serious settings will be more useful. For example, do you have a friend who asks you to come to arts events every weekend? Simply enter the person's name in the Block invites from field of the 'Block event invites' setting, and Facebook will automatically block any new event invitations from them. Similarly, adding a friend to your restricted list will ensure that thenceforth the person will be able to see only your public posts, effectively unfriending them without inviting any unpleasant histrionics.