Annualize

If you need to analyze data for taxes or a budget, then 1 of the best ways to do so is to figure out how much something will cost on a yearly basis. This is called annualizing data. Most salary and interest rates are not conveniently calculated on a yearly basis. Although this is especially important to investments and people on wages, instead of salaries, it can extend to gym membership costs or budgeting for a morning latte at a local coffee shop. With a calculator and some simple data, you analyze your income, expenses or investments for the year. This article will tell you how to annualize.

Steps

  1. Gather the data that you want to annualize. This could be pay stubs, receipts or a credit card offer that just came in the mail.
  2. Figure out the number to be annualized. Perhaps you receive a stipend of $500 per month, or $3.50 for a latte. In these cases, the dollar amount is the number to be annualized.
  3. Decide the time period that your current data covers. For example, if you buy a latte every day, your time period is 1 day. If you receive a stipend every month, then your time period is a month.
    • It is important to keep in mind that "daily" time periods may depend upon the number of days you work in a week. For example, if you buy a latte 5 days out of the week, then your time period is different than if you bought a latte 7 days out of the week.
  4. Figure out how many time periods are in 1 year. If your time period is a month, then there are 12 months in a year. If you buy a latte every day, then there are approximately 365 time periods in the year.
    • If you buy a latte every day you go to work, 5 days out of every week, then you must figure out approximately how many days you buy a latte within a year. There are 52 weeks in a year, so you would buy a latte 5 days out of every 52. Multiply 5 times 52 and you have 260 days out of every year.
  5. Multiply the number that you want annualized by the number of time periods in a year to figure out an annualized number. For example, if you annualize your stipend you multiply $500 by 12, and you would receive $6000 per year. If you annualize your latte purchases, you multiply $3.50 by 365, and you find you would spend $1,277.50 per year.
    • To figure out your annualized data for weekday latte purchases, then you multiply $3.50 by 260. You will find you would spend $910 every year on lattes.
  6. Use a formula to calculate an annual rate of return using a percentage. The formula is Annual Rate of Return = (1 + Monthly Rate of Return)12 � 1. The number 12 is an exponent, rather than a number to multiply.
    • If you have a quarterly rate of return, you would use an exponent of 4 rather than 12.
    • For example, you want to calculate what an Annual Rate of Return (ARR) would be if your investments kept giving you an 8 percent return for a year. You must first convert your percentage to decimals, so 8 percent is 0.08. Your formula would look like this: ARR = (1 + 0.08)12 -1. As you begin to do the problem, it would look like this: ARR = (1.08)12-1. Then ARR = 2.51817-1. Then, ARR = 1.51817. If you convert it into a percentage, your Annual Rate of Return is 151.8 percent. This would indicate a very good investment, but most ARR are much lower than this.

Tips

  • It is important to keep in mind that annualized data is usually an estimate. It does not take into account possible changes in the data in the remaining months of the year.
  • Annualizing percentages requires a different formula than annualizing data. You will need a more sophisticated calculator that calculates exponents.

Warnings

  • Annualizing data does not usually take into account compounding of interest on a daily basis. For this reason, it may not be the most accurate way to figure out your rate of return on investments that are compounded in more than 1 way.

Things You'll Need

  • Calculator
  • Data
  • Pen
  • Paper

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Sources and Citations

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