The factors that go into short-term financial decisions can get so complex that it becomes difficult to compare options. There's just a lot of ins and outs to keep in the ol' duder's head (if you were born after 1984, that's a Big Lebowski reference).
To make these comparisons easier, it is helpful to find a standard period of comparison. That's why most business information gets reported on an annualized basis (See: Annualize). The process of annualization looks at whatever you are comparing as if you were doing that thing for a full year.
This comes up a lot in interest rates. You might take out a short-term loan from a payday lender. Under the terms of the loan, it might cost you $10 to borrow $250 for two weeks. This might not seem like much ("hey, it's just ten bucks"), but if you annualize that rate, it comes out to more than 100%.
By comparison, most credit cards only carry an annual rate in the low 20% range. By annualizing the figures, you can more easily decide that putting that $250 on your credit card makes more sense than taking out the loan.
Related or Semi-related Video
Finance: What is an Annualized Return?36 Views
Finance, a la shmoop. What is an annualized return? Alright people, well
when you invest a dollar you hope or even expect to get more than a dollar [ATM machine]
back, at some point. And let's say you invested that dollar in Terminators
Closet -a leading dealer in cybernetic body enhancements. And it went from $1 a
share to a dollar ten six months later. Alright, nice return.
You made 10% in just six months but in most investing discussions ,investment [spreadsheet shown]
returns are discussed in the form of annual returns, not monthly or daily or
biannual numbers, so you need to convert your six-month return into an annualized [angelic glow]
one, and you can do the process here of computing that number that is if you made
10% in six months well then in a year presumably you could notion that you'd
have made 20%. It's not that you would have guaranteedly made 20% it's just [spreadsheet shown]
the math saying that well if you had compounded at that rate then you'd have
made 20%, so what if she made 10% in a month? Well the stock went from a buck a
share Jan 1 to a buck ten a share by Feb 1 .Well if you impute so that you can [calendar shown]
compute that month's gain of 10% would carry a compound rate of a hundred
twenty percent. Right ? You're multiplying 12 months times 10 there, that'd be
annualizing it meaning, that at that rate you are more than doubling your money on [spreadsheet shown]
an annualized return basis. And that's more than enough dough to keep
terminators closet popping out those Wi-Fi enabled contact lenses faster than [woman watches TV]
people can wear them.
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