This article was coauthored by wikiHow Staff. Our trained team of editors and researchers validate articles for accuracy and comprehensiveness. wikiHow's Content Management Team carefully monitors the work from our editorial staff to ensure that each article is backed by trusted research and meets our high quality standards.
This article has been viewed 216,146 times.
Learn more...
Annualization is a predictive tool that estimates the amount or rate of something for an entire year, based on data from part of a year. This tool is primarily used for taxes and investments. If you're paying estimated taxes, you'll need to annualize your income to determine how much tax to pay. With investments, you can annualize your rate of return to help choose your investment strategies. However, you can also use this tool to create a yearly budget for yourself or your household.^{[1] X Research source }
Steps
Method 1
Method 1 of 3:Annualizing Your Income
Download Article

1Gather income reports for 2 or 3 months. To annualize your income, you need a sample of the income you earn over a year. You can get this from paystubs, paid invoices, or even your bank statement.^{[2] X Research source }
 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.

2Total your income for the period. It's easiest to annualize income using months. Add up your income from all sources to get your total income for that period of time. Make a note of how many months of income you used to get that total.^{[3] X Research source }
 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 3month period.
Advertisement 
3Divide the number of months in a year by the months of income. To annualize your income, use the ratio of the number of months in a year (12) over the number of months in the period you used to get your total. When you divide, your result will always be a number greater than 1.^{[4] X Research source }
 For example, if you totaled your income over 3 months, your ratio would be 12/3 = 4.

4Multiply your total income by the result of the ratio. Once you've divided the ratio, multiple the total income you found for the period by that number. The result will be the estimated amount of income you earn in a year.^{[5] X Research source }
 For example, if your total income over a 3month 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.
Advertisement
Method 2
Method 2 of 3:Determining an Annualized Rate of Return
Download Article

1Familiarize yourself with the formula. The formula to calculate an annualized rate of return (ARR) may look fairly intimidating at first. However, once you break it down into pieces, it's not as difficult as it looks.^{[6] X Research source }
 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.

2Calculate your rate of return. To calculate the rate of return on your investment, subtract the ending value of your investment from the beginning value of your investment, then divide that number by the beginning value of your investment. Multiply the result by 100 to get your rate of return.^{[7] X Research source }
 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%.

3Determine the period to which your rate of return applies. Quantify the period of time over which you had the gain. Then divide (usually 365, the number of days in a year) by that number to find out how many of those periods are in one year.^{[8] X Research source }
 For example, suppose you had a 10.25% rate of return on an investment that was 65 days old. The number of 65day 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).

4Compound your rate of return by the number of periods in a year. Place the number of periods in a year in the formula to annualize your rate of return. Complete the calculation using the x^{y} button on your calculator.^{[9] X Research source }
 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.
Advertisement
Method 3
Method 3 of 3:Creating a Yearly Budget
Download Article

1Gather records of financial transactions for a 2 or 3month period. Typically, a few months of bank statements is all you need to annualize expenses and create a yearly budget. If you frequently use a credit card, get copies of your credit card statements for the same month.^{[10] X Research source }
 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.

2Annualize your income. Total your income over 2 or 3 months. Then multiply that total by the ratio of the number of months in a year over the number of months of income. This provides you with the amount of income you make each year.^{[11] X Research source }
 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.

3Organize your expenses into categories. You can make as many categories as you want. A broad category, such as "bills," likely won't be very helpful if you want to figure out where your money's going. On the other hand, too many individual categories add work and can get confusing.^{[12] X Research source }
 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.

4Identify the time period for each expense. To annualize your data, you have to know how often the expense occurs. Many recurring bills are monthly. However, you may have some that are every other month, every quarter, or only twice a year.^{[13] X Research source }
 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.

5Annualize expenses based on the data you have. Take the same formula you used to annualize your income and use it to annualize your expenses. Then total the annualized expenses in each category.^{[14] X Research source }
 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.

6Make adjustments where necessary to balance your budget. Financial experts recommend budgeting your money so that 50% of your income goes towards necessities, 20% towards things that you want, and 20% towards savings for the future. Organize your categories into these broader categories and see how your annualized numbers compare.^{[15] X Research source }
 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.

7Create a new budget based on your results. Once you've made your adjustments, take your annualized income and divide it by 12 to figure out how much money you have to work with each month. Then put in your expenses.^{[16] X Research source }
 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.
Advertisement
Community Q&A

QuestionI use QuickBooks, and a board member ask for an annualized profit and loss report. Is that just a yearlong profit and loss report from January to December?DonaganTop AnswererYes, "annualized" refers to a oneyear period, typically January through December.

QuestionHow do you annualize sales?Drew Hawkins1Community AnswerStart by gathering income reports for a 23 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.

QuestionWhy do you annualize returns?Drew Hawkins1Community AnswerThere 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.

QuestionWhat does annualized salary mean?Drew Hawkins1Community AnswerAnnualized 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!
References
 ↑ https://www.investopedia.com/terms/a/annualize.asp
 ↑ https://www.investopedia.com/terms/a/annualizedincome.asp
 ↑ https://www.investopedia.com/terms/a/annualizedincome.asp
 ↑ https://www.investopedia.com/terms/a/annualizedincome.asp
 ↑ https://www.investopedia.com/terms/a/annualizedincome.asp
 ↑ https://financetrain.com/howtocalculateannualizedreturns/
 ↑ https://www.readyratios.com/reference/analysis/annualized_rate.html
 ↑ https://www.readyratios.com/reference/analysis/annualized_rate.html
 ↑ https://financetrain.com/howtocalculateannualizedreturns/
 ↑ https://www.investopedia.com/university/guidetoplanningayearlybudget/creatingayearlybudget.asp
 ↑ https://www.investopedia.com/university/guidetoplanningayearlybudget/creatingayearlybudget.asp
 ↑ https://www.investopedia.com/university/guidetoplanningayearlybudget/creatingayearlybudget.asp
 ↑ https://www.investopedia.com/university/guidetoplanningayearlybudget/creatingayearlybudget.asp
 ↑ https://www.investopedia.com/university/guidetoplanningayearlybudget/creatingayearlybudget.asp
 ↑ https://www.nerdwallet.com/blog/finance/howtobuildabudget/
 ↑ https://www.nerdwallet.com/blog/finance/howtobuildabudget/
About This Article
to annualize your income, which is when you estimate its amount for an entire year based on information from a few months, start by gathering information for 2 or 3 months. For example, if you want to calculate your annual pay, find pay stubs for 3 months. Then, add up the total income you got during the period, and note down how many months it covered. Once you’ve finished your calculation, divide the number of months in the year by the number of months in the period of your records, which in the example would be 12 divided by 3. Finish by multiplying your total income by the result of the ratio, which in this case would be 4. For tips on how to calculate annualized returns, keep reading!