Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
It’s officially that time of year when you get closer to that thing you’ve been putting off. And for millions of Americans, that means getting to grips with their finances.
If you have avoided funding your 401(k) or open a brokerage account, you are not alone. Nearly half of American adults — 48% — say they have no investable assets, according to the Poll 2024 by Janus Henderson.
And for many, the reasoning behind procrastination is simple: Investing is (apparently) too complex.
It’s a pattern of thinking that, if not overcome, could cripple many young people financially, says Amos Nadler, founder of Professor of Wall Street and a Ph.D. in behavioral finance and neuroeconomics.
“It’s a bias we call ‘complexity aversion,'” he says. “And it’s the biggest barrier to building wealth for people who aren’t in the markets or who’ve never invested before.”
Here’s how this cognitive bias could be costing you money.
The importance of overcoming complexity aversion
At a very basic level, people who put off doing essential financial tasks have the same fears as those who can’t bring themselves to start an exercise routine – they don’t want to make mistakes or feel stupid.
Just as someone might say they don’t know the first thing about how all the fancy gym equipment works, a financially avoidant person might say, “‘Man, this is over my head,'” says Nadler. “I’m just 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 breaking up, but afraid that you will lose money that you put the time and effort into accumulating. And because the fear of losing what you have can outweigh the joy of building wealth, stay put.
The impulse is: “I’ve worked hard for this, and I’m risk averse. I’d rather just have the money,” says Nadler. “I know inflation is eating away at my money, but the market is so volatile, so I’m afraid.”
But the need to start investing—especially among young people—extends beyond the need for your money to keep up with inflation. By procrastinating on this particular financial project, you are missing out on what many experts call yours the most valuable asset: time.
The longer you are in the market, the more time your money will have to grow at a compound rate. For every year you delay getting started in the market, you are possibly cutting thousands of dollars from your future net worth.
Play with a Online compound interest calculatorand you’ll likely discover that sitting on the sidelines for even a few years can have a massive effect on your long-term earnings.
Consider a 20-year-old who invests $200 per month in a retirement portfolio that earns an annualized total return of 8%. By the time she’s ready to retire at age 67, she’ll have saved $1.25 million. If she starts at age 25, all other things being equal, her total drops to about $830,000. And if he puts things off until age 30, he would retire with $547,000.
How to get past complexity aversion
So how did you get started? 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), opting in can be an even easier way to get started. Designate a percentage of your salary to contribute to the account out of each paycheck and select one or more mutual funds for your portfolio.
These plans commonly hold highly diversified pricing options, such as index and target date funds, which give investors exposure to large swaths of the market.
Want to make extra money outside of your day job? Sign up for CNBC’s online course How To Earn Passive Income Online to learn about common passive income streams, tips for getting started and real-life success stories.
In addition, sign up for the CNBC Make It newsletter to get tips and tricks for success at work, with money and in life.
