Buying a home. The chance that you can pay for a new home in cash is slim. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you'll owe and the greater your chances of getting a lower mortgage interest rate.
Although it may seem logical to plunk down every available dime to cut your interest payments, it's not always the best move. You need to consider other issues, such as your need for cash reserves and what your investments are earning. Also, don't pour all your cash into a home if you have other debt. Mortgages tend to have lower interest rates than other debt, and the interest you pay is tax deductible. (If your mortgage has a high rate, you can always refinance. Use our calculator to determine how much you can save.)
A 20 percent down payment is traditional and usually helps buyers get the best mortgage deals. But many homebuyers put down less - as little as 3 percent to 5 percent in some cases. Those who do, however, pay higher monthly mortgage bills and a higher interest rate. They also pay for primary mortgage insurance (PMI), which protects their lender in the event they default.
For more on financing a home, read Money 101: Buying a home.
Paying for college. When it comes to paying for your children's education, borrowing makes far more sense than liquidating your retirement fund. Your kids have plenty of financial sources to draw on for college, but no one is going to fund your retirement except you. What's more, a big 401(k) won't count against you if you apply for financial aid since retirement savings are not counted as available assets.
It's also unwise to borrow against your home to cover tuition. If you run into financial difficulties down the road, you risk losing the house.
Your best bet is to save what you can for your kids' educations without compromising your own financial health. Then let your kids borrow what you can't provide, especially if they are eligible for a government-backed Perkins or Stafford Loan, which are based on need. Such loans have guaranteed low rates; no interest payments are due until after graduation; and interest paid is tax deductible under certain circumstances.
For more on educational financing, read Money 101: Saving for College.
Financing a car. Figuring out the best way to finance a car depends on how long you plan to keep it, since a car's value plummets as soon as you drive it off the lot. It also depends on how much cash you have on hand.
If you can pay for the car outright, it makes sense to do so if you plan to keep the car until it dies or for longer than the term of a high-interest car loan or pricey lease. It's also smart to use cash if that money is unlikely to earn more invested than what you would pay in loan interest.
Most people, however, can't afford to put down 100 percent. So the goal is to put down as much as possible without jeopardizing your other financial goals and emergency fund. Typically you won't be able to get a car loan without putting down at least 10 percent. A loan makes most sense if you want to buy a new car and plan to keep driving it long after your loan payments have stopped.
You may be tempted to use a home equity loan when buying a car because you're likely to get a lower interest rate than you would on an auto loan and the interest is tax deductible. But before betting the ranch, make sure you can afford the payments. If you default, you could lose your home. If you do opt for a home equity loan, be sure to pay it off while you still have the car -- say, no more than five years -- since it's painful to pay for something that has been consigned to the junkyard.
Leasing a car might be your best bet if the following applies: you want a new car every three or four years; you want to avoid a down payment of 10 percent to 20 percent; you don't drive more than the 15,000 miles a year allowed in most leases; and you keep your vehicle in good condition so that you avoid end-of-lease penalties.
Whatever route you choose, shop for the best deals. Remember, it's in the car dealer's best interest to finance at the highest rate possible, so look at what you'll pay overall, not just the monthly amount. If you tell your car dealer you can spend $400 a month, you could end up with a new car for $400 a month based on an uncompetitive interest rate.
For more on auto financing, read Money 101: Buying a car.
Next: Borrowing for other expenses