It's officially that time of year when you get closer to that thing you've been putting off. For millions of Americans, this means taking control of their finances.
If you have been avoiding Fund your 401(k). Or open a brokerage account, you are not alone. Nearly half of U.S. adults — 48% — report that they do not own any investable assets, according to A 2024 survey from Janus Henderson.
For many, the reason they procrastinate is simple: investing is (apparently) too complicated.
It's a style of thinking that, if not overcome, can cripple many young people financially, says Amos Nadler, founder of Professor Wall Street And Ph.D. in Behavioral Finance and Neuroeconomics.
“It's a bias we call 'complexity aversion,'” he says. “That's the biggest barrier to building wealth for people who aren't in the markets or who haven't invested before.”
Here's how this cognitive bias can cost you money.
The importance of overcoming aversion to complexity
On a very basic level, people who put off doing basic financial tasks have the same concerns as those who can't bring themselves to start an exercise routine — they don't want to make a mistake or feel foolish.
Just as someone might say they don't know the first thing about how all that fancy gym equipment works, a financially avoidant person might say, “Man, that's over my head,” Nadler says. “I'm not a numbers person.”
Feeling this way about money is closely related to another common cognitive bias known as Risk aversion. Essentially, you are not only afraid of failure, but you are also afraid of losing the money you have put time and effort into accumulating. Because the fear of losing what you have can outweigh the joy of building wealth, you have to stay put.
The motivation: “I've worked hard for this, and I'm risk averse. I'd rather just have the money,” Nadler says. “I know inflation is eating up my money, but the market is very volatile, so I'm afraid.”
But the need to start investing — especially among young people — goes beyond the need for your money to keep up with inflation. By procrastinating on this particular financial venture, you are taking what many experts call a “loss.” Most valuable assets: time.
The longer you stay in the market, the more time your money has to grow at an exponential rate. Every year you delay starting in the market, you are potentially cutting thousands of dollars off your future net worth.
Play with Online compound interest calculatorand you'll likely discover that sitting on the sidelines for even a few years can have a huge impact on your long-term gains.
Take, for example, a 20-year-old who invests $200 a month in a retirement portfolio that earns an annual total return of 8%. By the time she's ready to retire at age 67, she will have $1.25 million saved. If she started at age 25, with all other conditions remaining the same, her total would drop to about $830,000. If you put things off until age 30, you'll retire with $547,000.
How to overcome aversion to complexity
So, how do you start? You can always open a brokerage account or self-fund a retirement account, such as an IRA. Doing so requires just a few easy steps.
But if your employer offers a workplace retirement account, such as a 401(k), signing up may be an easier way to get started. Set a percentage of your salary to contribute to the account from each paycheck and choose one or more mutual funds for your portfolio.
These plans usually contain low-cost and highly diversified options, such as index and target-date funds, which give investors exposure to large swaths of the market.
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