A great deal of fuss has been made over the past decade about a number known as your credit score, or to be more specific, your score on the Fair Issac (FICO) scale. This post isn’t about that. It’s about a far more important number: your spending ratio.
As you put together and maintain your budget, you will hopefully have some money left over to save for emergencies or invest for long-term growth. The ratio between what you spend and save is your spending ratio, and it’s probably the most important number in your whole financial picture. You’ve probably heard stories about celebrities, professional athletes, and lottery winners raking in huge amounts of money only to wind up bankrupt before long. They didn’t have a healthy spending ratio, which was exposed once their source of income dried up.
Conversely, even people on a modest income can do quite well if they save enough of their income to build a “nest egg” for the future, as told in books such as The Wealthy Barber. Charles Dickens wrote this memorable passage in David Copperfield, “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Once your own budget is in order, calculate how much you have left at the end of the month, after your expenses. Is it 10%? 20%? Is it less than zero? If so, be prepared to cut your spending or find a new line of work. This number is your benchmark for success, and deserves quite a bit more attention than that credit score you see advertised on television.