We usually check out a bunch of travel guides (Lonely Planet, Frommer's, Rough Guide, etc.) from the library for a variety of places we are interested in. Then we skim the "Best of", "Top 10", or "Suggested Itineraries" in the front of the guides to narrow down where we'd like to go.
To keep costs low on flights, be flexible! Check out round-trip tickets, open jaw tickets, and two one-ways purchased separately. Look at a variety of departure and arrival airports.
http://matrix.itasoftware.com/ is great for this, because you can combine multiple airports and dates into one search.
For lodging, I use
www.hostelworld.com in the larger cities (many hostels have private rooms with or without a private bathroom; getting a little too old for the dormitories). I've never had a bad experience with a hostel that was rated at least 85% on Hostel World (although less than 85% might be fine as well). In smaller towns and developing countries, it's often much easier to just show up. Check out two or three places, always asking to see the room, and negotiate for price. Then go with the best one.
I've never been to South America, but for Central America I would highly recommend Nicaragua! We spent an absolutely amazing two weeks there. Nothing against Costa Rica, but Nicaragua feels much more authentic (less commercialized and touristy) and is much cheaper. Very mustachian-friendly (if air travel can be considered Mustachian at all): lodging $30 for a double room (could go cheaper if you do dorms or slum it), dinner with drinks $5, beer $1, excellent public transport (chicken buses) covers most of the country. It's also very safe (at least outside Managua, which we avoided completely). You do need to speak some Spanish, or be comfortable making a fool out of yourself using a phrasebook and gestures (we did the latter and it was fine). If you go, definitely check out Quetzaltrekkers in Leon. We did a two-day/one-night trek to the top of Telica with them, spending the night in tents just below the volcano's caldera. If you crawl to the edge at night, you can see the magma glowing. I think it was less than $50 per person for the guides, any gear you needed to borrow (tent, backpack, etc.), and food. And we met some really cool people in our group, which consisted of 8 people plus two English-speaking guides.