The following is a list of software I recommend. Most of it is free or extremely cheap.
Security
ZoneAlarm - A very popular firewall application. For personal use the basic Zonealarm is free.
AVG Antivirus Free Edition - A popular antivirus system which is free for home use.
Adaware Personal Edition - A popular spyware killer and nasty eliminator that is free for home use.
Spybot Search and Destroy - Another popular spyware killer and nasty eliminator that is free for home use.
Internet
Firefox - An alternative to Internet Explorer. Its more secure, its open source and its free! Internet Explorer 7 is about 3 years behind in terms of features. Why are people still using it?
Thunderbird - An alternative email client to Outlook. Its more secure, its open source and its free!
Filezilla - An excellent FTP client for uploading and downloading stuff from webpages. Its free to download.
Applications
Open Office - An alternative to Microsoft Office and lots cheaper. Its free and perfect for home or small office use!
The GIMP - A free graphics manipulation application. Similar to Paintshop Pro or Photoshop but much cheaper. It's free!
Misc
EditPad - Probably the best text editor available.
Sound
MP3Tag - A good application for tagging MP3 files.