Sorry to say but your buddy is dumb. I would have spent my money on $10,000 speakers instead.

Spending money outside your budget/income, you are just asking for trouble. With this hobby, you can find such good "value". You can get away with not being "rich" and still have a solid HT setup. $200 cables and a $10,000 amp is something that is not needed (unless you are rich and can afford it).
Well said.
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This is impossible to answer. It's all about the setup, first of all. Room size. Number of viewers. Huge room with huge screen might require a light cannon of a projector with a very beefy amp. A bedroom HT will never have 7.1, a receiver is fine, and the display doesn't have to be huge.
I've blown a lot on this stuff at this point. It's fun. Yep, my friends have called me anything from "completely insane" to "totally insane". And other variations of "insane".
I have two different friends who have teased me in front of others regarding my spending choices in this area. They joke, "He was deciding on either buying himself a nice car, or blowing it all on AV gear!". True story, because, well it's true. One of the ribbers is a lawyer, and the other is a mechanic.
So, I've spent as much as some people spend on a car. I have several friends with nice cars. Nice indeed. Wish I had one. Someday. 10 y.o. pickup still running strong. Would love a roadster. Convertible. That'd be sweet.
I have a friend with a serious passion for golf. That costs a lot if you play on at least a weekly basis at a decent course. A different friend loves his boat, and loves to go fishing. Yet another friend is addicted to travelling. Another has an RV.
With any of the "hobbies" above, all of the inherent costs, whether excessive feul costs, green fees, docking fees, international airplane tickets, hotel costs, would compare well with a healthy AV spender, IMO. Oh yeah, and what about the sports car lover.

Hell, how much is a nice Harley? yea.
Well, do these people think I'm insane?
You bet.
That all said, a fantastic HT is within the reach of many, IMO. I think that lack of education on setup is just as detrimental as the smaller budget might be.
Some ways to extend bang for buck. Three upright bookshelves for the front. Go cheaper on the surrounds. DIY if that's yer bag. Save as much as possible on accessories. Don't make the AV furniture eat up half of the budget.
Important keywords for me for the budget-minded:
- Monoprice
- Emotiva
- Ascend Acoustics
- Racksandstands, standsandmounts
- Panasonic plasma
- GIK
- Audiogon
- Craigslist
- Ebay
- URC
- Audioholics
