Recommended protection programs:

Keep all programs up-to-date and run them regularly!
If you do not update regularly they will not be able to catch any of the new variants that may come out.

Whilst it is important to have active protection against malware, please do not run more than one program of the same type in resident mode because they can conflict with each other.

Antivirus programs:


Here are my proposals. They are free versions of commercial programs. Choose only ONE.

Avira,
Here is a tutorial on its setup and use.
Note: A free version, on default, lacks a "WebGuard" and e-mail protection.

avast! Free Antivirus,
Avast! Installation Guide can be found here.

Microsoft Security Essentials,
Help and How-to section can be found here.

Note: All antivirus programs above protect against spyware as well. That's why running an extra antispyware program in resident mode is not needed.

Firewalls:


Firewall in Windows XP SP2/SP3 is insufficient because it doesn't really monitor outgoing data. Firewall in Windows Vista and Windows 7 is considered a better one and it can be sufficient if properly configured. Help on using Windows Vista firewall can be found here. A very good article about a firewall in Windows 7 can be found here: How to Manage Windows 7 Firewall.

There are several good but free versions of commercial programs available, like:

Agnitum Outpost Free

Privatefirewall

A tutorial on understanding and using firewalls may be found here.

Note: If you decide to install a firewall, make sure any other firewall software, especially Windows Firewall is disabled/uninstalled.
Disable Windows Firewall in Windows XP SP2/SP3:
- Click Start, click Run, type Firewall.cpl, and then click OK,
- On the General tab, click Off (not recommended), and then click OK.

Antispyware/antimalware programs:


Malwarebytes Anti-Malware Free
Instructions on updating and running a scan can be found here.

Spybot - Search & Destroy©®
A tutorial on its use can be found here.

SUPERAntiSpyware FREE Edition

Other programs:


Alternative web browsers:
- Firefox
- Opera
- Google Chrome

MailWasher - it lets you manage all the messages before downloading them, so you can filter out any unwanted e-mails.

KeePass - it is a completely free program which keeps all your passwords safe – you need to remember only one password. It encrypts password databases, has a portable version and a random password generator.
You may also like:
- LastPass (Password Manager, Form Filler, Password Management),
- RoboForm Password Manager.

K9 Web Protection - it is a content filtering program for a home computer.

In most cases, there is a good freeware program which can be used instead of a commercial application. Use the osalt.com website to find open source software alternatives or see this thread on BleepingComputer.com for an extensive list of Freeware Replacements For Common Commercial Apps.