This is kind of outdated in terms of the technology but the philosophy is right. Just look at my equipment list to see what new technologies I've used to replace or complement the old ones (checking the dates of use given at the end of each item would be helpful).
Want to record music in your bedroom/bathroom/basement? Then you need to build a small studio that'll let you do this. What you want is going to be a function of (i) how much you can afford, (ii) what you want to do with your music, and (iii) the quality/flexibility of recording.
The following list is an example of what a small home studio could/should have. There were several choices I had to make when I bought this stuff and I discuss why I made the choices I did. My equipment list contains detailed information on what I actually own.
Microphone: I tried out the Shure mics, but I found the Electrovoice N/D 357 to produce a greatly superior sound. It is a great stage mic and makes for a decent recording mic.
Guitars: You don't need to have guitars, but that's usually a given in a band these days. I started off with a fairly cheap guitar (an Epiphone Explorer) and graduated to a Steinberger Spirit. I use both the guitars for recording still: the Explorer is great for rhythm and has a lot of crunch, whereas the Spirit is good for playing lead. I have a collector's edition Ovation Acoustic/Electric guitar which is fantastic. I also have a Fender Stratocaster
Effects processor(s): I tried the boss pedals, etc., but I found going in for a multieffects unit, something like the Digitech RP-10, a lot more reasonable. If you're going to buy 3-4 effects, you're better off getting a unit like this one. Keep in mind that most of this is studio stuff, and the RP-10 might not be the best thing for playing live. I've found it works okay for me---I can program in my 5 favourite effects so I use the foot switches for those, and then I can generally switch to one other effect that is not in those 5, but one which I use invariably throughout the songs (i.e., my songs have one or two major effects, and I use footswitches 1-5 for small changes). I use the RP-10 for voice processing also, and as an analog synthesiser. In addition to the RP-10, I now also have Digitech GNX4 Guitar Workstation which is fantastic and lets you have exquisite control over each programmed effect.
Rhythm: Since you're doing it yourself, you need to decide what to do for the rhythm section. You could get a bass guitar, a drum machine, a really cheap keyboard, or you could get a decent keyboard where you can program all of these. In the section on using computers, I discuss how you can use a computer for your rhythm section, which is what I use primarily. I got the Yamaha PSR-510 for about $480, which I didn't use for more than a couple of songs. Someone suggested getting a professional keyboard on the newsgroup rec.music.makers and you might be better off doing this. I think a keyboard like the one I have will always be useful as a controller when combined with a computer-based sequencer. The biggest feature in this keyboard is the custom accompaniment feature, which is completely programmable. That is, I can program my one drum beat, fills, bass line, and other things and use it just like any other accompaniment. If you hear some of my songs, you'll find it hard to believe the drums are from a keyboard (or at least some people do)---I never realised you could make so much noise with it! The bad thing about the keyboard is the crappy samples.
The following factors helped me decide whether I should get a professional (and expensive) keyboard or a consumer keyboard with a lot of features: (i) access to computers that can do some of a stuff a synth can do, (ii) desire to record music with a live band ultimately (or by playing the actual instruments), and (iii) the use of the keyboard (in my case, I wasn't into making serious electronic noise with it, but I just wanted something that I could eventually use as a controller).
I think computers are the best way to record music these days.
4-tracks: There are many 4-tracks you can buy new for around $300. To me, the best ones seem to be the Tascam Porta07 and Yamaha MT120. When I tried them both, I found the MT120 to be superior, but I forget why I say this now. I think the MT120 has 2 speeds, and you can record 4 tracks at once. Plus there are individual eqs for each channel, if I recall right. I'd advise you to try both out if you want something to use as a song writing tool. I also advise you to avoid the Fostex models, because when I tried them out they had a lot of noise and hissing.
For those who can afford something more expensive: I bought a Tascam 464 for the following features: auto punch in (which I need since I work alone---none of the lower end models, the porta 07, Tascam 424, etc. have this) and two (high) tape speed recording. I do think the auto punch-in is important if you're one of those people who make mistakes invariably when playing. So if you want to fix them, this is the way to do it. The auto punch-in feature is also good for recording step by step (verse by verse, say). I bought the 464 for $640. I find it to be exceptional in performance, especially combined with a DAT and computer sequencer.
8 tracks: I considered getting the Yamaha MT-8X (it's an 8-track recorder that records on a cassette tape), but I found the Tascam offered pretty much the same features except for the number of tracks. Since I use a sequencer and a DAT for bouncing, I decided not to go for an 8-track. I was concerned about fidelity issues that comes with having narrower space on the tape to fit all the tracks. I also have access to a computer that can record up to 32 tracks digitally but I use it only when what I am playing is really complicated so I can do digital editing.
Digital/hardisk recording: There are many hard disk recorders around, but I feel they are too expensive. I personally thought that the DigiDesign machine worked rather well, but again, price is an issue. Harddisk recording using a PC is possible, but you need a disk with a fast access time and lots of space (about 10 meg for a minute of stereo recorded at 48 kHz). However, if you're using a MIDI sequencer, you can save on a lot of space. See the section on using computers.
Monitors: I recommend you invest in a pair of excellent headphones (spend a 100 bucks---I use the JVC digital ready headphones HA-D810) instead of investing in a cheap monitor (I personally find it easier to try to get some depth in the sound using phones than speakers). Then play the tapes on your regular cassette after mixdown to make sure it's okay (this is a general rule---try your mixdown tape on as many machines as possible).
Mixdown sources: I use a Sony TCD-D7 portable DAT and the DAT drive on my computer for recording the final mixes, and a Technics tape deck with HX Pro for dubbing copies straight from DAT.
Recording Media: I use Maxell XL II 60 minute tapes for recording from source. In general, high-bias 60 minute tapes come recommended.
Computers (different kinds) can be used at various stages of your recording. At the extreme, you can use a computer to do digital hard disk recording, editing, and adding effects. I normally record the final mix on my workstation and "normalise it" so all the songs have the same volume. This way, I can also put it up my songs on the Internet. I also use the DAT drive on my workstation for copying songs directly to harddisk.
You can use a Personal Computer for sequencing with a soundcard (see my equipment list for more details). I happened to use a Gravis Ultrasound MAX with the following configuration to record most of Traversing a Twisted Path, my first album: 486 DX2 80, 8 MB RAM, and a 840 MB harddrive. I initially used a 2 x 1 GHz dual-processor Pentium III machine with 1 GB of RAM and 120 GB of hard disk space to the do the same for my second album Twisting in the Wind. I now use the latest dual-core Opteron technology for making music (4 GB+ of RAM, 1 TB of HD space, latest dual core 64-bit Opteron CPUs). Plenty of software comes with the soundcard that you can use for sequencing. In my view, instead of going for an expensive synth/sampler combination, a PC is the thing to go for since you can sample any instrument and use it in your sequencer. Expect to spend anywhere between $1000-$2000 for the whole set up. If you already have a PC, a soundcard might cost you anywhere from $200-$1000.
I am not being specific here since computer technology changes so rapidly. Here are a few tips to keep in mind when purchasing a computer to record music: