As the warm spring weather approaches and nature begins to flourish, many people are stepping out of their homes more often, engaging with society, and reevaluating their life goals. However, financial management is often one of the most easily overlooked tasks during this process. For many, facing their financial situation and planning for investments can be a challenging task.
The hesitation and procrastination in taking action on financial investments are not necessarily due to a lack of desire for a better financial future. It is often rooted in a psychological barrier towards money – the perception that investment and financial planning are cumbersome and complex.
In the human psyche, there is a subconscious tendency to avoid dealing with things that appear complex and hard to understand, as it may lead to making mistakes or feeling incompetent.
According to a report by CNBC Make It, Dr. Amos Nadler, a behavioral finance and neuroeconomics Ph.D., and the founder of Prof of Wall Street, termed this psychological phenomenon as “Complexity aversion.”
This mindset acts as one of the major obstacles hindering wealth growth. Many individuals feel they are “not good with numbers” and find dealing with finances troublesome, sometimes opting to do nothing at all.
A survey conducted by Janus Henderson in 2024 revealed that nearly half of American adults (48%) have not engaged in any financial investments.
Furthermore, “Complexity aversion” often goes hand in hand with “Risk aversion.” Many individuals fear investment failures, worrying that their hard-earned money might shrink due to market fluctuations, and hence avoid any form of risk-taking.
While these concerns may seem valid and provide a sense of security, they may also prevent individuals from experiencing wealth accumulation through appreciation and compounding, trapping them in a cycle similar to living paycheck to paycheck.
These biases and fears can cause individuals to miss out on significant wealth growth opportunities. Long-term financial investment is one of the best ways to combat inflation and achieve wealth appreciation. If young people delay investing due to fear of complexity and failure, they might miss out on essential wealth accumulation tools – time and compounding.
Time and compounding are core principles in promoting investment growth, allowing money to generate new returns continuously. Moreover, the longer the investment period, the more significant the compounding effect.
For instance, if a 20-year-old individual invests $200 monthly with an 8% annual return rate, by the time they retire at 67, they would accumulate approximately $1.25 million. If they start investing at 25, the final amount would decrease to $830,000. And if they delay until 30 to start investing, the retirement accumulation would only be around $547,000.
This signifies that every few years of market entry delays could potentially lead to significant reductions in future wealth. Therefore, overcoming psychological barriers toward wealth accumulation and initiating investments early are key to achieving long-term growth.
If you feel fearful about investment and financial planning, you can start with some simple steps. For instance, opening a brokerage account or an Individual Retirement Account (IRA) is a good choice. It usually only takes a few minutes to set up. Participating in your employer’s retirement matching contribution plan such as a 401(k) may be an easier starting point.
Regarding investment choices, many employer retirement plans offer low-cost, highly diversified investment options like index funds and target-date funds. These funds enable investors to participate with lower risks and achieve long-term capital growth.
Moreover, utilizing automatic transfer features (such as investing a fixed amount monthly) can help overcome psychological barriers of “Complexity aversion.” This way, you do not have to make investment decisions each time, allowing the system to execute automatically and reduce psychological stress.
In conclusion, taking action is always the first step towards financial freedom. The primary obstacle hindering wealth accumulation is the fear of accumulating wealth. Therefore, only by letting go of psychological barriers that hinder taking action can one truly embark on the path to unlocking a financial future.
(Disclaimer: This content is provided for general informational purposes only and is not intended as recommendations. The publisher does not offer advice on investment, taxation, legal matters, financial planning, real estate planning, or other personal finance matters. For specific investment matters, consult with your financial advisor. The publisher assumes no responsibility for any investment decisions.)