It's officially the time of year when you can tackle that thing you've been putting off. And for millions of Americans, that means getting a handle on their finances.
If you have been avoiding financing your 401(k) or opening a brokerage account, you are not alone. According to a 2024 Poll by Janus Henderson.
For many, the reason for procrastination is simple: investing is (seemingly) too complex.
It's a thinking pattern that, if not overcome, could financially paralyze many young people, says Amos Nadler, founder of the company Wall Street professor and PhD in behavioral finance and neuroeconomics.
“It's a bias we call complexity aversion,” he says. “And that is the biggest obstacle to building wealth for people who are not in the markets or who have never invested before.”
Here's how this cognitive bias can cost you.
The importance of overcoming complexity aversion
At a very basic level, people who put off doing necessary financial tasks have the same fears as those who can't bring themselves to start exercising – they don't want to make a mistake or feel stupid.
Just like someone might say they have no idea how all that fancy exercise equipment works, a financial avoider might say, “Man, this is beyond me,” Nadler says. “I just don't like numbers.”
This approach to money is closely related to another common cognitive bias known as risk aversion. Basically, not only are you afraid of screwing up, but you're afraid of losing the money you've put into accumulating time and effort. And because the fear of losing what you have can outweigh the joy of building wealth, you stay put.
The impulse is: “I worked hard for this and I'm not afraid of risk. I'd rather just have cash,' Nadler says. “I know inflation is eating into my cash, but the market is so volatile I'm scared.”
But the need to start investing – especially among young people – goes beyond the need to have money to keep up with inflation. By postponing this particular financial project, you are missing out on what many experts call yours the most valuable acquisition: time.
The longer you are in the market, the more time your money has to grow at a compound rate. For every year you delay starting your business, you could potentially save thousands of dollars on your future net worth.
Have fun with online compound interest calculatorand you'll probably find that sitting on the sidelines for even a few years can have a huge impact on your long-term profits.
Consider a 20-year-old who invests $200 per month in a retirement portfolio that generates an annual total return of 8%. By the time she's ready to retire at age 67, she'll have $1.25 million saved. If she starts at age 25, all other things being equal, her total will drop to about $830,000. And if he saves everything until he's 30, he'll retire with $547,000.
How to overcome your aversion to complexity
So how do you get started? You can always open a brokerage account or fund a self-funded retirement account such as an IRA. To do this, just follow a few simple steps.
However, if your employer offers a workplace retirement account, such as a 401(k), signing up may be an even easier way to get started. Designate a percentage of your salary to be contributed to your account from each paycheck and choose one or more mutual funds for your portfolio.
These plans typically include low-cost and highly diversified options such as index funds and target-date funds, which give investors exposure to large swathes of the market.
Do you want to earn extra money outside of your day job? Sign up for CNBC's online course How to earn passive income online to learn common sources of passive income, starting tips, and real-life success stories.
Plus, sign up for CNBC Make It's newsletter for advice and tips on achieving success at work, with money and in life.
