If you listen to the TV and radio advertisements you would think you can and should borrow money for just about anything. Credit card companies and banks encourage this by constantly sending you credit card offers and increasing the limits on your existing credit cards. They use compelling arguments to try to convince you that you owe it to yourself to borrow money. You deserve to live a better, more fulfilling lifestyle. It’s the American way! As a result, many people are sucked deep into debt by borrowing money for things they should have never gone in debt for in the first place. So when is it a good idea to borrow money?

Except in rare circumstances, the only two things you should ever go in debt to buy are a house and a car. These are both large-ticket items that most people could not afford to pay cash for, but are necessities that most cannot do without. Any other items should not be purchased unless you have the means on hand to pay for them.

If you look at what you spend your money on, just about everything can be classified into the following three categories:

Needs

Each person’s individual needs are different. If you have a family you have to consider their needs as well (kids clothing, school supplies, doctor’s visits, etc.). The main thing is that you understand what your needs are and that you have the resources to meet those needs. Anything that falls within the needs category should be able to be purchased with your regular weekly/monthly income. The notable exception in this category is a house and car as stated above. However, even though you need a house and a car, you don’t necessarily need to live in a mansion and drive a Mercedes. Your needs still have to match your budget!

Wants

Each person also has unique “wants” that motivate our lifestyle. For some it’s taking vacations, for others it’s buying the latest electronic gadgets. There is absolutely nothing wrong with wanting things; in fact, it provides motivation to work hard to get them. However, if you immediately go into debt just to be able to satisfy your wants, then you need to reevaluate your priorities. Most of the “wants” in your life can be obtained much easier if you are willing to plan ahead and save up for it. You will end up enjoying that vacation or new TV much more if you’re not dreading the next credit card bill that’s going to reflect your latest impulse spending. You also will end up paying less for it when you’re not having to make interest payments on top of the purchase price.

Emergencies

It’s very hard to plan for emergencies, because they are by definition unforeseen circumstances that usually require immediate action on your part. To avoid having to go into debt to meet the emergencies that may come up in your life, you should always have an emergency fund set aside that is only used for real emergencies. This doesn’t have to be a large sum of money. In fact, $1,000 would probably cover most emergencies that you will encounter (appliance failure, car repairs, etc.). Having this money set aside for these emergency situations will end up saving you a lot of money that you would end up paying in interest if you had to borrow the money on short notice.