You want to cut the spacer so that you have about 15mm of static preload on the spring with the fork cap screwed on.
On the '02s, with no preload adjuster, that means the spacer should be just about flush with the top of the fork tube. (With the fork fully extended, of course.)
To double check, measure the depth of the fork cap, i.e the part that goes into the tube. If it's 15mm, then the spacer should be flush. If it's more than that, then the spacer should be recessed into the tube by the amount greater than 15mm. If the cap is 18mm deep, then the tube recessed 3mm.
Likewise if the cap depth is less. If it's 13mm then the spacer should stick up 2mm above the tube.
DON'T start with it the same length as stock. There will be a lot of spring force to overcome to get the threads started (much more than stock) and it makes it easy to cross-thread the caps.
'07 DL650, '01 DR-Z400S, '99 SV650 (race bike), '80 GS1000S, '85 RZ350, '08 Ducati 848