My little guy's birthday is Saturday - he'll be TWO!!! Hard to believe. Between him and my daughter, I've done quite a few birthday's already and I've never spent more than $25.
For my son, since he's so small still, it'll just be family and close friends. I'll serve a simple lunch that I make from ingredients I have on hand (burgers on the grill, potato salad, crackers and a cheese dip). I'll make the cake myself using a cake mold I bought at a garage sale for 50 cents, and I'll decorate the house with items I purchased at the Party Store in one of their clearance sections. For my son we are doing a Pooh theme and I was able to buy hats, plates, napkins, crepe paper and even a centerpiece for $5 total.
When I do goody bag's for my daughter's parties, I rarely spend more than $1 per bag. In the basement I have a box for "party supplies." Whenever I find a great goody bag item or party decoration on clearance, I stick it in there. This is also the box I raid for school parties or other times I need stickers or other small gifts.
Another thing I do to make birthday's special is decorate the kid's doorways while they sleep. I string crepe paper from the doorway and put a small wrapped present on the floor by their door. The cost is minimal and it is exciting for them to wake up to! We also have a family dinner on the actual day of the birthday with cupcakes for dessert.
I'm sure it'll be harder to keep the parties at a reasonable cost as the kids get older and want their parties to be at Chuck E Cheeses, etc. like their friends, but for now, my kids have just as much fun at their "homemade" parties and I have more fun planning them!