We didn't add on, but we converted a garage into living space. It cost way less than a new addition, of course. It was a very, very good decision for us: it added about 225 square feet of space with a large window, so it increased the natural light in the adjacent room as well. It gave us a room big enough for the kids to do school without getting in each others' way (we homeschool), and where we could leave projects out if we paused work on them. Later, we outgrew the table space in our kitchen and the new room became the dining room. It made a huge difference in how well the house worked for us.
What made the expense worthwhile for us was careful planning. We spent over a year discussing what we wanted, why we wanted it, and whether those desires could be accomplished some other way. Also, we discussed what we didn't want, and that was a factor in keeping costs down; for instance, many houses in our neighbourhood had installed bay windows, but I knew the extra sill space would just be a magnet for clutter, so we chose a plain window. We installed commercial vinyl tile ("Just like the floor in Petsmart!" said our kids) because it was easy to clean.
So this is a plug for giving lots of attention to nereo's second question.