(MONEY Magazine) – We're not going to lecture you. You know all about the downsides of debt. You know you shouldn't run up a credit-card tab for a trip to Tahiti, and you know that such behavior has helped push bankruptcies to an all-time high. But all the doomsaying and admonishment about debt has obscured a dirty little secret of financial planning: Sometimes debt is good.

In fact, you can go overboard avoiding it. Eschewing debt at all costs, experts say, could actually prove quite costly if it leaves you with no cash in reserve for an emergency. "No one can say, 'I won't lose my job.' Or 'The hot water heater? Nah, that never breaks,'" warns Michael Kidwell, vice president of Debt Counselors of America. "There's always an accident waiting to happen."

Now we're not advocating rampant spending, so don't take this as our blessing to hit the mall (or the road to Tahiti). Instead, we're recommending that you learn to separate good debt from bad debt. Financial planners will talk about "needs analyses" or some other jargon until you're glassy-eyed, but it's not that complicated.

Good debt is what you use to buy anything you really need (a home, car or education, for instance) but can't afford without wiping out your bank account or liquidating your investments. Of course, you must also be able to afford the payments. (Those same financial planners would suggest keeping total debt and housing payments at no more than 36% of your income.) The final key to good debt is the form it takes: High-rate credit cards, for example, are invariably a terrible way to carry debt.

But those cards notwithstanding, today's low interest rates on most loans make debt especially affordable. If you have the cash, the decision to borrow hinges on a comparison of what you'll spend in interest with what your savings could earn. Take the average mortgage rate of 7.1%. Given the deductibility of mortgage interest, your after-tax borrowing cost is 5% if you're in the 28% bracket (taxable income of $42,351 to $102,300 for married couples, $25,351 to $61,400 for singles). Earning more than 5% shouldn't be hard. The same goes for the 9.37% average 10-year home-equity loan, which amounts to 6.75% after taxes for folks in the same bracket.

The interest on car loans, however, is not tax deductible, so you'll have to beat the 8.84% average outright. "If your stocks are making more than the 8% you can get on a home-equity line, take out the loan," says Paul Yurachek, a Washington, D.C. financial planner. "But if you're earning 4%, you effectively increase your return by not borrowing."

With these considerations in mind, we looked at the merits of borrowing for three major necessities.

--Your home. The chances that you can avoid debt altogether by paying cash for a house are slim. The more realistic question is how much to put toward a down payment. While it may seem logical to plunk down every available dime, that's not always best. What you need to consider are the size of your cash reserves, what you expect your investments to make and your income prospects.

In fact, home buyers commonly put down as little as 3% to 5%. "It often makes sense to make a low down payment on a house," says Robin Leonard, author of Money Troubles: Legal Strategies to Cope with Your Debt, "because you'll want as much cash on hand as possible to fix it up."

In addition, if you don't expect to stay put until you pay off your mortgage, focus on what you can afford every month. For instance, if you put 5% down on a $150,000 home, at today's rates your monthly payment will be $958. Cough up another $7,500 to reach 10% down, though, and the monthly payment drops a mere $50 to $908. So if you want to leave yourself a cash cushion or think you can earn more than $50 a month on that $7,500, you might opt for 5% down. If you envision steady raises, that $958 will constitute a dwindling percentage of your income in the years ahead.

--A new car. Paying cash for a car is more within the realm of possibility. Let's say you have $15,000 in your 2.5% passbook savings account earmarked for wheels. Should you plunk it all down or finance? Unless all you need is an old clunker you can pick up for $1,000, consider a loan. Again, your goal is to make your savings grow at a rate that outstrips a car loan's interest rate, so you may be better off putting $2,000 down on a car, taking out a loan and redeploying the rest of your savings in funds or stocks. Unlike your new Jeep--which will plummet in value as soon as you drive it off the lot--those investments will likely appreciate over the long term.

If you borrow, get a loan from a bank or let the dealer act as a broker. Just be careful to look for the best rate--pay no more than average, now about 8.84%--not a particular monthly payment, says Keith Gumbinger, vice president at the loan research firm HSH Associates. Gumbinger tells of a shopper who told her car dealer she could spend $200 a month. The dealer steered her toward a $200 a month offering--at a whopping 22% interest rate.

What about the super-low 2.9%, even 1.9%, loans that dealers tout? Well, in the fine print you'll find that most of those deals last for only two years or so. After that, you'll either have to refinance or the rate will automatically adjust to 8% to 9%. And a lower interest rate on a car loan doesn't produce a dramatic dollar savings, because the loan is short term and relatively small. Say you get a decent 8% rate on a $15,000 five-year car loan. Your payment would be $304 a month. Borrow the same amount at 2%, though, and your monthly payment would drop by only $41, to $263.

Some lenders offer car loans with terms as long as seven years, but keep the length as short as you can afford. That advice applies as well if you're considering a home-equity loan to pay for a car, a move most financial planners frown on because you're essentially betting the ranch you can pay for your car. If you do borrow against your home, boost your monthly payments so the loan will be paid off while you still have the car. "Do you want to be paying off your car in 20 or 30 years?" Gumbinger asks. "Probably not."

--Your child's education. Borrowing on your kids' behalf may send some planners--and parents--into a cacophony of tongue clicking. Nevertheless, debt can be far preferable to depleting your retirement investments. (For an exception to this rule against mixing retirement savings and college funding, see page 174.)

To get the best deals on a student loan, let the student borrow, especially if your kid's eligible for a government-backed Perkins or Stafford Loan. The Perkins has a fixed 5% rate, and the subsidized version of the variable-rate Stafford tops out at 8.25%; with either one you pay no interest during college. "It's almost stupid not to take out a subsidized loan," says Kal Chany, author of How to Pay for College Without Going Broke, "since you borrow for free for four years."

Parents can also take out a Parent Loan for Undergraduate Students, or PLUS, which lets you borrow for all school costs (including books and transportation), minus whatever aid you receive. The interest rate on this variable-rate loan can't exceed 9%.

And thanks to last year's tax law, parents with less than $75,000 in adjusted gross income ($55,000 for singles) can deduct a portion of the interest on qualified education loans in 1998. With the money you'll save, you can start a vacation fund for that trip to Tahiti after all.