This Money Bias Is the Biggest Hurdle to Building Wealth, Says Financial Psychologist

This is the season when people finally tackle tasks they’ve been postponing. For countless Americans, this involves confronting their financial situations.

If you've been avoiding funding your 401(k) When starting a brokerage account, many people find themselves in the same situation. According to data, nearly half of all U.S. adults—48%—say they have no investable assets. The 2024 survey conducted by Janus Henderson .

For many, the rationale for postponing tasks is straightforward: investing appears overly complicated.

It's a pattern of thinking that, if not overcome, could cripple many young people financially, says Amos Nadler, founder of Prof of Wall Street and holds a Ph.D. in behavioral finance along with neuroeconomics.

He explains this phenomenon as 'complexity aversion,' which represents the major obstacle preventing individuals new to investing or those not involved in financial markets from accumulating wealth.

This cognitive bias might be causing you to lose cash.

The significance of conquering one's fear towards complex situations

At its core, individuals who delay tackling crucial financial responsibilities share similar apprehensions with those hesitant to begin an exercise regimen—they fear making errors or looking silly.

As someone might admit their lack of knowledge about operating sophisticated gym machinery with the phrase "I don’t have a clue how this stuff works," a financially avoidance-prone individual could express similar sentiments by saying, “This financial jargon is way beyond me,” according to Nadler. They may also add, “Math isn’t really my forte.”

Experiencing such feelings towards money is strongly linked to another prevalent mental bias referred to as risk aversion Basically, you're not just worried about making mistakes, but also concerned about potentially losing the resources you've worked hard to gather. Since the dread of loss often surpasses the satisfaction derived from amassing more wealth, this keeps you stationary.

The urge is, “I’ve put in a lot of effort to earn this money, and I prefer playing safe. It’s better for me to hold onto the cash,” Nadler explains. “Even though inflation is eroding my savings, the markets are unpredictable, which makes me nervous.”

However, the necessity of starting investments—particularly for younger individuals—goes further than just keeping pace with inflation. Delaying this specific financial task means missing out on something numerous experts refer to as your most valuable asset : time.

The longer you remain invested, the more opportunity your funds have to increase through compound interest. Each year you put off entering the market could mean losing out on thousands of dollars in potential wealth accumulation for your future.

Play around with an online compounding interest calculator , and you might find that staying out of the game for just a couple of years can significantly impact your earnings over time.

Think about someone starting their retirement savings at 20 years old, investing $200 each month in a portfolio yielding an annualized total return of 8%. When they reach 67, they will have accumulated approximately $1.25 million. However, if they begin saving at 25 under identical circumstances, the total would be around $830,000. Should they delay beginning this investment strategy until they're 30, upon retiring at 67, they’d accumulate roughly $547,000.

How to overcome reluctance towards complex situations

Therefore, how do you begin? You might consider opening a brokerage account or funding a retirement account like an IRA. Accomplishing this involves only a handful of simple steps. .

However, if your employer provides a workplace retirement plan like a 401(k), joining might be an equally straightforward approach to begin investing. You can set aside a portion of your income automatically from every paycheque towards this account and choose one or multiple mutual funds for your investment mix.

These plans typically include affordable, broadly diversified choices like index and target-date funds, providing investors with access to significant portions of the market.

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