First of all, while there are exceptions, the basic difference between the familiar and the formal is that the former is typically used for friends and family members, while the formal is for use in other situations. You might think of the distinction as something like the difference, at least in the United States, between addressing someone by a first name or something more formal. The danger of using the familiar form when you shouldn't is that you might come across as insulting or condescending, even if you don't intend to. In general, you should use the formal forms unless there's a reason to use the familiar form.
There are two situations where the formal form is almost always used:
- In most of Latin America, the plural familiar form (vosotros) is nearly extinct for everyday conversation. Parents will address even their children as ustedes, something that sounds overly stuffy to people in Spain.
- There are a few regions, notably Colombia, where the informal forms are seldom used.
- When speaking with family members or good friends.
- When speaking to children.
- When talking to your pets.
- Usually, when someone starts addressing you as tú. Generally, however, you should not respond in the familiar form if the person who addresses you as tú is someone in a position of authority over you (such as a police officer).
- When someone lets you know it's OK to address him or her in familiar terms. (The verb for "to speak to someone in familiar terms" is tutear.)
- When meeting peers, if such is the custom in the region for your age group and social status. Again, you can take your cues from those around you and the person you're speaking with.
- In most Christian traditions, when praying to God.

