What is ‘Annualize’
To annualize is to change a short-term calculation or rate into an annual rate. This conversion most oftentimes happens with rates of less than one-year duration and as usual does consider the effects of compounding. Annualizing is useful in determining the turn in of investments and in the calculation of the real cost of a loan.
The annualized rate is not a certify, and its accuracy depends on the variance of the rate.
BREAKING DOWN ‘Annualize’
The annualized be entitled to is also known as an “annualized return” and is like “run rate.” In the case of accommodation products, the annualized cost is often expressed as an annual percentage grade (APR). The APR considers every cost associated with the loan, such as significance and origination fees, and converts the total of these costs to an annual reproach that is a percentage of the amount borrowed.
Consider an investment that recrudescences 1% a month. Because a year consists of 12 months, the refuge will return 12% on an annualized basis. However, because of retail volatility, the annualized return of a stock cannot be determined with a great degree of certainty based on its performance during a shorter period. As an model, a stock may return 1% in month one and return -.5% the following month.
Annualization is also helpful for determining the actual cost of a loan. Specific loan products, such as payday advances and title loans, charge a flat finance fee of $15 or $20 to touch someone for a nominal amount for a short period such as a few weeks or a month. Put into worded in dollars the $20 fee does not appear to be large, however, expressed as an annualized toll, 240%, it is extremely large relative to the loan amount.
Annualizing for Tax Avails
Annualization can involve converting a taxation period of less than one year into an annual heart period. This conversion helps wage earners establish an junk tax plan and manage any tax implications.
For example, an individual may multiply his monthly receipts by 12 months to determine his annualized income. They may then see their things tax rate based on the calculation. For many, this is helpful when budgeting every ninety days taxes.