(MONEY Magazine) – IT'S A HIGH-TECH VICIOUS CIRCLE. NEW computers get more powerful by the day. Better hardware leads to fancier software, which leads more and more people to bank and E-mail and do their homework by computer. And that, in turn, leads you to worry that if you don't buy a decent system soon, you might as well be Amish. But you hesitate. After all, competent new computers cost upwards of $1,400. Besides, your current machine, if you have one, may still run its Paleolithic software perfectly well. (Who needs Windows 95 anyhow?) Meanwhile, computers keep getting more powerful. And you keep falling even farther behind the times.

Sound familiar? If so, you've got plenty of company. For every American who goes on-line, nine remain on the sidelines, and many of them have yet to buy even their first machine. Indeed, 30% of Americans still say they fear computers, according to a recent survey by Byte Back, a consulting firm in Orange, Calif.

You don't have to fear computers to be a bit apprehensive about shopping for one. But now's a good time to stop worrying and start looking. These days, savvy buyers have the computer industry right where they want it--engaged simultaneously in a vicious price war and a giant technological leap forward. A modest machine built today for your den or home office packs twice as much punch as its counterpart of two years ago--and at half the cost. What's more, it can take you to a world of multimedia software and on-line information that was barely off the drawing board at the dawn of this decade.

Even so, a decent system is no small investment. To get the most for your money, you have to do your homework--and a fair share of legwork. You'll need to learn the lingo, clip some ads, visit a few stores, and deal with salespeople who may or may not have your best interests at heart. But don't fret if your expertise isn't state of the art. "It's okay," says Sean Fulton, a senior technology editor at HomePC magazine. "If you're willing to learn as you shop and take your time, you'll end up making an informed choice." Here's our step-by-step guide to the decisions you'll face along the way.

IBM OR APPLE?

The first choice every computer shopper has to make is between an IBM-compatible, which is also known simply as a PC (for personal computer), and an Apple Macintosh. The two rivals are built with different operating systems, which until recently meant that software made for one of them couldn't run on the other. The new Power Macintoshes equipped with special software are capable of running PC programs, however.

Though the differences in price are shrinking, PCs are generally less expensive than comparable Macs, partly because PCs are made by a host of competing companies, including Acer, Compaq, Dell, Gateway 2000, Hewlett-Packard, Micron and Packard Bell in addition to IBM. Macs are made almost exclusively by Apple Computer. IBM-compatibles account for about 91% of the personal computers at use in homes and offices. As a result, software is often designed first--and sometimes exclusively--for them. But even with the much ballyhooed advent of Windows 95, which makes IBM-compatibles simpler to operate than they used to be, Apples remain the friendlier computers. And Macs are usually much simpler to hook up to devices like printers or modems.

So if you want the lowest price and the widest possible choice of software, go with a PC. If ease of use matters most to you, then pick a Macintosh. And if you bring a lot of work home, consider buying whichever of the two matches the system used in your office.

HOW MUCH COMPUTER DO YOU NEED?

Whether you commit to a Mac or a PC, you want computing power adequate to your needs plus some room to grow--without spending for features you'll never use. Start by getting to know these three essential computer components:

The microprocessor. The computer's single most important part, the microprocessor, is identified by the type of chip it is, followed by the speed at which it operates, measured in megahertz (MHz). For example, the designation P90MHz indicates a machine that runs on a Pentium chip at 90MHz. The faster and more advanced a computer's processor, the costlier the machine will be. Among IBM-compatibles, Intel's Pentium chip has superseded a family of older processors (led by the 486 chip) over the past year. Apple has also replaced an earlier series of Motorola chips (the 68030 and 68040) in its new machines, recently unveiling a new processor called the PowerPC. For your computer to handle all essential household tasks now and in the years to come, you'll want a Pentium or PowerPC chip and a speed of at least 75MHz. For a home machine, a chip any faster than 100MHz is overkill.

RAM (random-access memory) refers to the amount of information a computer can juggle at one time. RAM is measured in megabytes (MB), and having enough megabytes is the most vital element in getting your computer to perform many different tasks quickly. A large amount of RAM (16MB and up) will allow your computer to handle such memory-hungry software as large databases and programs with complex graphics. It will also make it easier for you to do more than one thing at a time, such as connecting to an on-line service while printing a document. Don't settle for less than 8MB of RAM, and seriously consider 16MB if you can afford it. If you can stretch your budget in only one direction, it's smarter to buy more RAM than extra processing speed.

Hard-drive capacity is the amount of space the computer has available to store programs and data files. It's measured in either megabytes or gigabytes (one GB is equal to 1,000MB). The more capacity you have, the more software, documents and other data you can stash on your machine. "And one rule," Fulton notes, "is that new software will never use less memory than versions that came before. Programs are always adding new features." Windows 95, for example, grabs about 40MB of hard-drive space all by itself, whereas its predecessor, Windows 3.1, took up only 10.5MB. Fortunately, hard-drive prices have plummeted in recent months, to less than $250 for each 500MB of capacity. Plan on buying 500MB to 1GB.

A few years ago, understanding just those three components might have been enough for you to choose a respectable computer. But now that home computers can perform far more tasks, there are other terms that belong on your must-know list. Make sure, for example, that you get a CD-ROM drive, the device for reading compact disks that was virtually unheard-of on home computers before 1992. Software programs will increasingly be distributed on CDs rather than floppy disks, says Jahan Salehi, president of Solute Inc., a computer consulting firm based in Dobbs Ferry, N.Y. As we note in the table on page 169, look for a CD-ROM drive that runs at quadruple speed (also listed as 4X).

Consider, too, how much you want to spend on the computer's video and audio. If you like the idea of watching the cutting-edge graphics in this year's hottest games, look for a 15-inch or bigger color monitor with a noninterlaced display (to reduce flickering), a dot-pitch rating of 0.28mm or less (for sharp resolution) and at least 1MB of VRAM (video RAM, for smooth video images).

Much of the latest software comes with sound--ranging from simple human speech to full orchestras. You're set on this count if Macintosh is your choice, because the current crop of Apples features fine built-in audio. If you're buying a PC and don't want to miss a note, make sure your machine will work with an audio-enhancing soundcard (see the table on page 169).

WHAT CAN YOU AFFORD?

The easiest way to get a sense of how far your computer dollar will go is to shop the newspaper ads before you set foot in a store. But how do you compare one advertiser's Pentium 90MHz, 12MB RAM, 250MB hard-drive system to another's Pentium 75MHz, 16MB RAM, 540MB hard-drive package? The basic answer: You don't, or you will lose your mind.

One simple way to keep things straight is to get out some low-tech index cards. List the prices for Pentium 75s with 8MB of RAM and 300MB of hard- drive space on one index card, Pentium 75s with 12MB and 540MB on another, Pentium 90s with 8MB and 750MB on yet another, and so forth. Once you do that, price ranges will appear not just among different cards, but within each card as well. You can then choose a card that describes the system most appropriate for your needs and start checking out the lowest-priced deals.

While you're narrowing your options, cull your list down to well-known brands. Consumers used to be able to save so much by buying cheap clones that the risk involved was often worth it. Today, that price gap has all but disappeared, making no-name computers no particular bargain.

WHERE TO BUY

These days, you can buy a home computer at specialized computer shops; electronics stores that also carry things like stereo systems and VCRs; discount office-supply stores like OfficeMax and Staples; vast computer "superstores" like CompUSA; and mail-order operations of every size and description. Your decision here will depend both on how much you can afford to pay and on how much hand-holding you need while you pick out your system. In general, you'll get the most personal attention from computer shops and the least from mail-order outlets, with the others somewhere in between. Wherever you go, these five rules should help you get a better deal:

Ask, don't tell, about price. These days, costs are falling so fast that the price of a system may drop from one weekend to the next, though the store may not have posted new prices yet or the mail-order outfit had time to change its ads. So always inquire about the price of the systems you're interested in without mentioning the advertised price.

Remember to figure in delivery costs. While many local stores deliver your system for free, mail-order firms will typically charge an extra $50 to $100.

Stick to your guns. You'll almost certainly run into salespeople who will push you to buy a system that's more powerful and more expensive than you want. Don't budge. At the same time, don't accept used or "refurbished" parts just to save a few bucks. Finally, when you take delivery of your computer, make sure the manufacturer's name is on each box and that the serial numbers on the components match any numbers on the packaging. That way, you have some assurance that the system is new and still covered by warranty.

Find out about guarantees. Local stores should agree in writing to send someone to your home to fix any problems free of charge within a month of your purchase. Likewise, mail-order firms should agree in writing to ship replacements immediately for parts that go bad in the first 30 days. Both stores and mail-order operations should allow you to return your computer within 30 days if you aren't satisfied with it. Most computermakers also offer a standard warranty covering parts and labor for at least one year.

Use a credit card instead of cash or a check. Because any problems are likely to occur soon after your purchase, you may be able to withhold payment until the dispute is resolved.

If computer shopping sounds a little like buying a car, there's a good reason. It is. And, just like a car, if you buy the right computer, your investment will last for years and maybe even take you places you never knew existed.

For advice on software, see page 172.