It’s officially that time of year when you take time out to do those things you’ve been putting off. For millions of Americans, that means taking their finances seriously.
If you’ve been avoiding funding a 401(k) or opening a brokerage account, you’re not alone. Nearly half of U.S. adults (48%) report having no investable assets, a survey shows Janus Henderson 2024 Survey.
For many people, the reason behind procrastination is simple: investing (seems) too complicated.
Amos Nadler, the company’s founder, said this mindset, if not overcome, could lead to many young people struggling financially. wall street professor and Ph.D. Behavioral finance and neuroeconomics.
“It’s a bias we call complexity aversion,” he said. “For those who are not in the market or have never invested before, this is the biggest barrier to building wealth.”
Here’s how this cognitive bias can cost you money.
The importance of overcoming complexity aversion
Fundamentally, people who put off important financial tasks have the same fears as those who can’t get started—they don’t want to make a mistake or feel stupid.
Just like someone might say they have no idea how all this fancy fitness equipment works, a financially shy person might say, “Man, this is beyond me,” Nadler said. “‘I’m just not a numbers person.'”
This feeling about money is closely related to another common cognitive bias; Risk aversion. Essentially, you’re not only worried that you’ll mess up, but you’re also worried about losing the money you’ve accumulated by investing your time and effort. Because the fear of losing what you have may outweigh the joy of accumulating wealth, you stay put.
The impulse is: “I worked hard for this, and I’m risk-averse. I’d rather just have cash,” Nadler said. “I know inflation is eating away at my cash, but the market is so volatile that I’m scared. “
But the need to start investing — especially among young people — outweighs the need to use money to keep up with inflation. By procrastinating on this particular financial project, you’re losing what many experts call your most valuable asset: time.
The longer you stay in the market, the longer your money has to grow at the rate of compound interest. Every year you delay entering the market, you could be reducing your future net worth by thousands of dollars.
Using an online compound interest calculator, you may find that even waiting on the sidelines for a few years can have a huge impact on your long-term returns.
Assume a 20-year-old invests $200 per month into a retirement portfolio, earning an annualized total return of 8%. When she is ready to retire at age 67, she will have saved $1.25 million. If she started at age 25, her total earnings would drop to about $830,000, all else being equal. If she delayed things until age 30, she could retire with $547,000.
How to overcome an aversion to complexity
So, how do you get started? You can always open a brokerage account or a self-funded retirement account, such as an IRA. Doing so requires just a few simple steps.
But if your employer offers a workplace retirement account, such as a 401(k), opting in may be an easier way to get started. Designate a percentage of each paycheck to be deposited into the account and select one or more mutual funds for your portfolio.
These plans typically hold low-cost, highly diversified options such as index funds and target-date funds, giving investors exposure to large swaths of the market.
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