Have you heard of “The Micawber Principle”?
Elsewhere on this blog, I quoted “Wilkins Micawber” in David Copperfield, by Charles Dickens:
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
This quotation (italics mine) is so well-known that it is called “The Micawber Principle”. Let’s ponder its meaning for a moment.
Even if you’re not familiar with the “pounds, shillings, and pence” currency system* that (originated during the Roman Empire and) was used in Britain in Dickens’ day, the principle’s principal meaning is obvious:
Income > Expenditure = Happiness
Income < Expenditure = Misery
I trust Dickens and Micawber won’t mind if I update and translate a bit:
Annual income $48,000, annual expenditure $47,940, result happiness.
Annual income $48,000, annual expenditure $48,060, result misery.
Take note of how very small is the difference in annual spending — the difference of 1 shilling between “nineteen nineteen and six” and “twenty pounds ought and six” — that is the difference between happiness and misery. Just 1 shilling out of 20 pounds! The financial proportions in my example using an income of $48,000 are the same as the proportions in Dickens’ £20 (assuming my math is correct). It’s basically the difference between spending 99.8% of your income or spending 100.2% of your income! If your spending is approximately the same as your income, the smallest thing, just a daily coffee, can be the difference between solvency and slavery.
It’s the most basic law of personal finance. Don’t spend more than you earn. Live within your means. Pay yourself first. Save something for a rainy day. Consistently spend more than you earn and you turn your life into a morass of debt and despair. Do the opposite — live below your means, save, invest and get some compounded earnings — and you’ll enjoy both the confidence that comes from knowing you’re able to manage your financial affairs as well as the peace of mind that comes from having some accumulated wealth that can be used to handle an emergency or can help support you in your old age.
Another important point is that Dickens’ Micawber shows that either happiness or misery is possible with the same income, which is to say the principle applies to any income. Regardless of whether your income is $40,000 a year or $40,000 a month or $40,000 a day: If you spend 99% (or less) of it, result happiness; spend 101% (or more), result misery. Of course, it’s more pleasant to live within your means on a larger income. But many people with very large incomes are financial disasters who end up with nothing but debt. People who are able to exercise the self-control needed to live within their means on a small income will most likely be able to do the same on a large income. Because happiness is always better than misery, someone with an income of $48,000 and spending of $47,940 is in a better position than the person with an income of $4,800,000 and spending of $4,860,000.
While the Micawber Principle, as stated above, focuses on the knife’s edge where income and spending are approximately the same, the results become stronger as the happiness and misery spending levels move further apart.
Consider:
Annual income $48,000, annual expenditure $47,000, result great happiness.
Annual income $48,000, annual expenditure $49,000, result great misery.
Annual income $48,000, annual expenditure $46,000, result greater happiness.
Annual income $48,000, annual expenditure $50,000, result greater misery.
Annual income $48,000, annual expenditure $43,000, result much greater happiness.
Annual income $48,000, annual expenditure $53,000, result much greater misery.
It all starts with this simple rule. If you can’t manage to keep your spending below your income, then all the personal financial advice in the world isn’t of any use to you.
* “Nineteen, nineteen and six” or “nineteen pounds, nineteen and six” is 19 pounds, 19 shillings and 6 pence, written as £19.19s.6d. In Dickens’ time the relative values of £, s, and d were:
- £1 (1 pound) = 20 shillings
- 1 shilling = 12 pence (pennies)
Thus, 1 pound = 20 shillings = 240 pence
Amounts of money were stated in terms of £.s.d (pounds, shillings, pence), somewhat similar to what Americans might say if they said a thing cost 19 dollars 9 dimes and 5 pennies. Americans don’t say things like that because U.S. currency is based on the decimal system, with 1 dollar equal to 100 cents. Since 1971, Britain has used a decimalized currency with 1 pound equal to 100 “new” pence and the shilling equal to 5 new pence, or 1 pound = 20 shillings = 100 new pence.
