Hi,
Well hostels aren't so bad. But you should go to the recommended places listed in the travel guides like Fodors.
Also there is another economical option that a lot of backpackers are getting into more and more. It's called "couchsurfing".
This is a community linking backpackers with hosts, people that will share their home to travelers, and in most cases also guide their guests through the local sites and flavors of the city.
The trust system for these exchanges is very successful, as on the site, they list feedback from other travelers, and allow you to view profiles of each host or traveler.
In my experience, I have hosted and had been hosted by several people. The experience is worthwhile, because you DO get the insight of the places via the eyes of the people who live there. And these communities do encourage friendships to grow out of these exchanges.
Feel free to check out these two popular sites. I'm sure you will be impressed by how many people are doing it:
http://www.couchsurfing.com
This site seems to be very popular for Americans traveling abroad. Consider this like friendster for the traveler... but friendlier :)
http://www.hospitalityclub.org
This one is very very popular for European travelers. The interface is not as fun as couchsurfing, but if you are looking to making connections with more foreign travelers, this is the site to register with. I believe the membership is much higher than couchsurfing.
Well good luck in your travels.
Melissa in Paris