When it cannot run the software I need it to run in a timely manner.
When it cannot play videos without stuttering, or my gaming framerates drop below 30 frames/second (the same as a standard TV broadcast). As a side note, a lot of people think their whole computer sucks when this happens, but it’s usually merely because they are using integrated graphics or (rarely) an old, uselessly weak graphics card; many computers can be made to appear to speed up simply by dropping in a decent nVidia/Radeon card. My computer got a slight across-the-board boost with a GT240, and a real kick in the pants with a GTX 465 even for basic tasks like the Windows desktop. Right now, I’m running on a 3-year-old computer that is perfectly fine after adding in a better video card despite the fact that the CPU is three generations behind and was a low-end, budget chip when it was made.
Realistically, most people can do just fine on a PC that is obsolete by 3–5 years so long as it has at least 2 GB of RAM (much of that taken up by Windows) since most people do nothing more hardware-straining than Netflix. Gamers, graphics designers, and engineers (especially software engineers) have far higher requirements. Those who try getting by with anything older than a Pentium 4 and/or on less than 2GB of RAM should consider replacing their system though, since such a system has no chance at running much of the software that has come out in the last few years.
@cutiepi92 More RAM generally helps, but only to a point. If you do a lot of multimedia editing or CAD then you want as much as you can fit, but generally once you get past about 4GB, you reach a point of rapidly diminishing returns. My desktop runs 6GB, of which I rarely use much more than half of it for normal, day-to-day stuff like gaming, or image editing, though it bogs a bit when transcoding video.