Q&A for How to Annualize

Speaking about annualized portfolio return, it gives an investor a sense of how a portfolio has performed from the point the calculation starts until the moment the calculation ends on an average annual basis. It is not a very useful measure if you have only been invested for 18 months — there is not enough information to tell you anything valuable. It becomes more useful when you are looking at longer periods of time.

Yes, "annualized" refers to a one-year period, typically January through December.

Start by gathering income reports for a 2-3 month period to use as a sample. For instance, you can use pay stubs, invoices, or even your bank statement. Add up your income for the sample period and make a note for the total number of months you used to get that amount. Then, divide the number of months in a year by the months of income. Multiply your total income by the result to find your annualized income for the year.

There are a few good reasons you would want to annualize your returns. Annualization is a useful predictive tool that estimates the amount or rate of something for an entire year based on a sample from a part of the year. You use it for taxes and investments. For instance, if you're paying estimated taxes, you can use your annualized income to figure out how much you need to pay. For investments, you can annualize your rate of return to help choose investments. You can even use the tool to create a yearly budget for yourself or your household.

Annualized salary is actually pretty straightforward. It's essentially just your estimated salary for a whole year based on a sample of what you get paid. So for example, if you get paid $5,000 USD a month, then for a year (12 months), your annualized salary would be $60,000 USD. You can annualize a variety of things from your sales earnings to your grocery spending budget. All you need is a sample amount that you can convert into an annual amount!