Let me tell you about my friend. She is a sheep in wolf’s clothes, albeit an exceptionally well dressed wolf with a taste for designer gear. She’s a sinner who masquerades as a saint (in financial terms) because she clears her credit card bill at the end of every month. She tells me this, delighted with herself, thinking she’s going straight to personal finance heaven.

I’m afraid she’s not.

“But I’m not in debt”, she might say, as she tries to hide the carrier bags weighing her down. She has heard me banging on about the foolishness of not clearing one’s balance and she’s smart enough to know that at 14% APR, all that designer gear she buys on credit could end up costing a whole lot more if she were to let it mount up at all. That’s good.

She’s still prioritising Prada over her pension. And that’s not good.

How so? Well, I know my friend. I know she doesn’t have her financial basics in order. She’s married with kids and earns a very good living but doesn’t have any significant savings should disaster strike – nothing like the three to six months’ salary that is recommended. She doesn’t have a fund for her kids’ university education (“Sure that’s years away”, she’d tell me). She has a contributory pension through work but I know she’s not putting in nearly enough to make proper provision for her retirement.

She is effectively diverting funds from things that really matter in the medium to long term into her wardrobe. She’s going to kill me for this.

So if you’re spending the money that should be providing a comfortable living for you in your retirement or putting a buffer between you and the workhouse, then you can’t afford it, whether you clear your balance at the end of the month or not.

In personal finance, we talk about good debt and bad debt. Good debt is sustainable and you incur it in order to increase your value. Examples would be a mortgage (although these days there are many people out there who see their mortgages as bad debt!), a loan to pursue a course that will improve one’s employability or a business loan.

Bad debt is unnecessary and unsustainable. It is debt incurred to acquire things you don’t really need or that will not maintain or increase their value over time, the like of designer shoes, clothes and handbags, meals out, the Kindle that is still in the box, those Le Creuset individual soufflé dishes, when you’ve never made a soufflé in your life and never will.

Don’t get me wrong – you or my friend can spend your hard-earned cash on whatever you like, as long as you can afford it. And by afford it, I mean as long as you have your emergency, education and retirement funds in place. Until you get there, it might be a good idea to think about purchases in terms of good or bad debt.

If you are in the habit of acquiring unnecessary things that are not generating income (I know my friend will try to tell me the Prada handbag was absolutely necessary and that it will increase in value, and what would I know?) you are almost as foolish as the spender who doesn’t clear her credit card balance. Why? Because you are displacing money that could be spent on the important stuff, the good stuff: your peace of mind and your and your family’s future.