I wrote this guide based on my own experiences trying to create live-sounding music all at home, at a small fraction of what it takes to record at a professional recording studio. As an example, try listening to this song. By live-sounding, I mean just like a band with acoustic/electric guitarists/bassist, keyboardist and drummer. Vocals are the exception however as you need proper room acoustics to achieve a quality vocal recording. Budget does not mean you need not invest in a proper software, though there exists free tools that you can use, which I listed down.
A good computer with lots of RAM, 1GB minimum, a sound card that has required basic I/O and can handle soundfonts, e.g. Creative Audigy 2. Hard disk with lots of space, I mean it!. 100GB would be a minimum.
This basically has 2 parts, 'Loop Editing' and 'Audio Editing', as I called them.
A loop based editing software like Sony Acid 5. This, I feel is a must-have. This will basically be used as a composing/arrangement tool. You will lay-out your drum/guitar/bass parts. Unlike Cakewalk Sonar, Steinberg Nuendo, Adobe Audition etc., I believe Acid does true loop editing, though the others can do some kind of looping. You will finalise how the drums will play like in Acid. I will elaborate on this under the drums section of this guide. Also you roughly record/mix the guitar/bass arrangments to at least have a feeling of how the whole song will turn out.
Once you have a master guide track, you will record the song proper under your preferred 'Audio Editing' tool .
Tips
The drums are the most tedious to record in terms of creating your own groove patterns and fill-in, and panning/mixing.
Acoustic guitars
http://www.musiclab.com/products/realgtr_info.htm
Keyboard