Simple is sometimes betterBefore agonizing over not being able to afford the latest multitrack recording or highest-input Pro Tools system, consider this: some of music's most amazing recordings were made on systems with limited options.
Consider one recording that I use when teaching multi-track recording: Marvin Gaye's epic hit, "Ain't No Mountain High Enough". This recording was made in a recording studio on only a four-track recorder; in total, four tracks were recorded to make this epic song, and it was good instruments, good microphones, and even better musicians that came together to make this recording -- no Pro Tools editing, no Auto Tune, and no 24-bit sampling.
My point is this: if you're confident about what you're recording, and you've got great chops on your instrument, it doesn't matter how you record; you'll still have a product you'll be happy with. And if you take some time to put together the perfect recording rig for your budget, you can offer the best representation of your talents, even with limited spending.
Select your spaceFirst, start by reading the tutorial about setting up your studio space for recording. After you've got your room selected, it's time to stock your studio.
Choose your mediumThe first thing to figure out when setting up your home studio is what you wish to record to.
Do you plan on recording with a computer, or with a stand-alone recording device like a digital multitrack? Each way has it's advantages and disadvantages; however, the most bang-for-the-buck today is computer recording, especially if your computer was made anytime in the last few years.
If you aren't computer-savvy, consider a product like the Fostex MR-16HD ($399), an all-in-one digital recorder capable of recording four tracks simultaneously, and mixing up to sixteen tracks per session.
If you're going for a computer-based interface, the options are limitless. The most popular interfaces are FireWire interfaces by manufacturers like M-Audio and Presonus. The things to look for when selecting an interface are pretty basic: at least two microphone inputs with preamps (which allow you to plug in high-quality microphones and use them without a mixer), speaker and headphone outputs, and of course, compatibility with your current system. From there, choose whichever software you wish to use.
Pro Tools vs. everything else
Digidesign's Pro Tools software suite is the standard of almost every major commercial and project studio in the world, and with good reason. Pro Tools is highly stable, offers limitless expansion, and the industry-standard compatibility means you can start a project in your home studio and quickly take it to almost any studio in the world for completion.
For most of the tutorials here, I'll be referencing Pro Tools because of its widespread use. Pro Tools comes in three versions: M-Powered, for use with lower-cost M-Audio interfaces; LE, which is designed for use with the MBox and Digi 003 products; and HD, which is meant for use with higher-end systems.
When using Pro Tools, it's necessary to work with a compatible interface. Pro Tools M-Powered is a fantastic version of Pro Tools that's designed to work with many of M-Audio's less expensive interfaces; the software alone will run you close to $250, but it's well worth it. You can use M-Powered Pro Tools with interfaces such as the M-Audio Fast Track Pro ($349).
Pro Tools LE requires the purchase of either the Digidesign MBox 2 ($450 new, less if purchased used) or the Digi 003 ($2195)/Digi 003-Rack ($1369).
The only exception is Pro Tools Free, a version limited to 8 tracks with limited capabilities; however, it'll work with an on-board sound card and doesn't require a specialized interface.
Other software optionsIf you choose not to go the Pro Tools route, there are many additional options you can consider, well within any budget.
Apple's built-in GarageBand software is fully capable of multitrack recording, although the mixdown options are somewhat limited. If you have a recent Mac with OS X, GarageBand is many times included for free.
Apple's Logic software is quickly gaining a reputation for great quality multitrack work as well. Other software packages include Cakewalk and Cubase. One thing to remember is that it's very easy to over-buy when getting started. Stick to something that's intuitive when you're just starting out and that will have the ability to expand as you do over time.
The other gear
Once you've selected your interface and software, it's time to procure the other things you'll need. How "fancy" your equipment is depends on your budget and needs. At the very least, you need a microphone and monitoring speakers.
Which microphone you select, again, depends on your needs and what interface you're using. If you're not using an external interface which includes a microphone connection, you'll want a microphone that's either self-powered or USB powered. Mics like the Samson C01U ($299) simply plug in to your USB port.
A good starter microphone like the Audio-Technica AT2020 ($99) or the Shure SM57 ($99). Both are perfect for instruments and vocals. From there, it's up to you what you want and what you can afford. Check out this link for more great microphones for under $200 each.
Monitoring speakers serve a very important purpose: allowing you to hear well and mix your project to the very best. Choose something within your budget that sounds the best to your ears; your local music store should be able to help you audition the speakers in a controlled environment before purchase. From the Sony MDR-7506 monitor headphones ($99), M-Audio BX5a ($299/pair) to the JBL Nearfield Monitors ($2400/pair), there should be something that works perfectly for you in every price range.
For more must-have accessories for your home studio, check out Five Things Every Home Studio Needs.