I've loved makeup ever since I was a little girl (and not allowed to wear it!), and even now as an adult buying a new nail polish or lip gloss is my favorite little treat to myself.
The qualilty of drugstore makeup is getting better and better all the time; while I used to never be able to find any foundation that didn't turn my pinkish-pale skin orange, now the big brands sell pretty much every shade imaginable, and color cosmetics are just as varied. However, there are some things where I think it makes more sense to spend the money, and others where I don't.
My main splurge is foundation, because I think the more expensive brands just look more natural and there's less risk of the dreaded line at the jaw. If you keep an eye on the ads, you can make sure to buy it when the manufacturer is doing a gift with purchase and get a whole new set of high-end makeup for the price of one bottle of foundation, which makes it pretty affordable.
I go mid-range, i.e. still drugstore but the more expensive drugstore brands, for things like skincare products and eye makeup. I have sensitive eyes and wear contacts, and have had some terrible experiences with super-cheap mascara and eyeshadow. Mascara's effectiveness has more to do with the brush style and shape than it does formula, according to the experts...if you find something that gives you the effect you want, stick with it (and replace it every six months!).
Interestingly, I found out in researching this post that there are only a few manufacturers of wooden makeup pencils, so it's entirely possible that drugstore eyeliner or lip liner could be made by the same manufacturer as a high-end line. I know I have had just as good performance from pencils that cost $1 as I have with more pricey ones. Lip gloss and nail polish don't vary a ton by price, either, so have fun there.
Where do you spend on makeup and where do you save?