If your income is extremely regular, you may not need more than a month of income to complete an annualization. If you receive income from multiple sources, make sure you have information for all sources you want to include.
For example, suppose you have 3 monthly paychecks of $7,000, $6,500, and $6,800. Your total would be $20,300 of income over a 3-month period.
For example, if you totaled your income over 3 months, your ratio would be 12/3 = 4.
For example, if your total income over a 3-month period was $20,300, your annualized income would be $20,300 x 4 = $81,200. You may not have to annualize your income to pay estimated taxes. For example, in the US, you pay estimated taxes based on your actual income for that quarter – not what you project you’ll earn later.
The full formula is ARR = (1 + rate of return per period)# of periods in a year – 1. The 1 simply turns a percentage into a whole number so you can compound it. That’s why it’s subtracted at the end to get your final rate. Essentially, all you do is compound the rate of return by the number of periods. If you have a monthly rate of return, you would compound the rate by 12. A weekly return would be compounded by 52, while a daily return would be compounded by 365.
For example, if you set up a portfolio with $10,000, and it now has a balance of $11,025, you have a total gain of $1,025. According to the equation, your rate of return is (11,025 – 10,000 / $10,000) x 100 = 10. 25%.
For example, suppose you had a 10. 25% rate of return on an investment that was 65 days old. The number of 65-day periods in a year is 365 / 65 = 5. 615. If your rate of return happened to be a single day or a single month, you can skip this step and compound your rate of return by 365 (days) or 12 (months).
For example, your equation for the ARR continuing the example would be (1 + 0. 1025)5. 615 – 1 = 0. 7296 or 72. 96%. Your annualized rate of return on the investment, therefore, is 72. 96%. There are significant limitations to an annualized rate of return. Specifically, you have no guarantee that you’ll be able to continually reinvest the money at the same rate.
Use income and expenses across the same time period. In other words, if you annualize 3 months of income you should also annualize 3 months of expenses.
For example, suppose you have 3 monthly paychecks of $4,200, $5,100, and $4,700, for a total of $14,000. Your annualized income would be $14,000 x 12/3 = $14,000 x 4 = $56,000. Be sure to include any other sources of income in your equation. If you have any money that you only receive once a year, such as a bonus, you can simply add it into your annualized income.
For example, you might have categories such as “house payment,” “utilities,” and “car. " Under “utilities,” you would include bills such as electricity, gas, telephone, trash, and water and sewer. Under “car,” you might include your car payment, car insurance, and fuel. If there are specific expenses that you think are getting out of control, or that you want to keep particular tabs on, make them their own category. For example, assume you believe that you’re spending too much money buying lattes from the café near your work. You might create a “latte” category specifically for that expense.
You’ll also have expenses that are daily or weekly, or that happen a few days a week. For example, if you get fuel for your car once every other week, the time period for that expense for the purposes of your annualization equation would be 52 / 2 = 26. Expenses that only occur once or twice a year don’t have to be annualized. Simply add them into your annualized total.
If you have several expenses in one category that all have the same time period, you can annualize them together. For example, if your car payment and your car insurance payment are both monthly expenses, you could total them and only make one calculation.
If this is your first time doing an annualized budget, you may find that the proportions are far off track from where they need to be. Balancing a budget takes time and effort. Identify problem expenses that you think you can decrease or eliminate entirely. For example, if you have a subscription to a magazine that you never read, you can save that cost by simply canceling the subscription.
For expenses that only occur once or twice a year, divide the total expense by 12 to determine the amount of money you should put towards that expense each month so that you’re ready to pay it when it’s due. For example, if you pay $300 in renter’s insurance once a year, you would need to put away or earmark $25 each month.
