Antivirus:
AVG, Kaspersky, Avast (stay away from Norton its junk these days, too much bloatware/slows your system down, used to love them).
Spyware:
Ad-Aware, Spybot
Firewall (Software):
Kaspersky, Zone-Alarm
Firewall (Hardware; a must for a broadband connection)
D-Link, Linksys both make decent home hardware firewalls for Cable/DSL internet connections
Single best thing you can do thou, is dump Outlook and IE. Switch to Firefox and Thunderbird, best part they are free:
Firefox Browser
http://www.mozilla.com/en-US/firefox/firefox.html
Thunderbird Email Client
http://www.mozillamessaging.com/en-US/thunderbird/
Grabbing Firefox, Thunderbird, the free version of AVG and Spybot (all free). Make sure you always have the latest updates for your OS and a hardware firewall and you would be set.
Avoid downloading and installing software over the internet as much as possible (or at least only from reputable sites) that is where a lot of the Trojans and viruses come from. Running Windows with IE and outlook without a hardware firewall, no matter what anti-virus you have is like begging for trouble.
Virtual machines and offline storage are certainly an option but why put a pad lock on the barn door if your aren't going to lock the door at night? Secure your computer first then do the extra measures if needed after.
(Same Windows XP install here for 6 years now without an outbreak; knock on wood)