I wish my dad would be willing to build me a home cockpit. At least he rebuilds real planes, I'll have to do with that

TrackIR is a GREAT product but there is a cheaper alternative (if you're willing to do some wiring) that I hear works as good or better and costs about $10. It can be found here:
http://freetrack.online.fr/english/It's definitely worth a head tracking product either way you go.
Get a good precision stick/yoke (saitek X52 is my choice, the CH yoke is nice too if you prefer a yoke, also the Thrustmaster Cougar (I think)HOTAS is a very precise stick, but it is $300)
and a set of pedals (I just got the Saiteks and I love them, better forces, adjustability, and looks than the CH ones)
Freeware add-ons have been good enough for me so far, but I would recommend the above payware expansions, they are all quality products.
Triple-head monitors are a great addition also, but I dont know how well this would work with a head tracking program.
You could have your dad, instead of building a full-fledged home cockpit, modify your chair a little bit to move the stick between your legs, the throttle on the left armrest, and mount the pedals to the floor directly in front of you. This will help you get a full-body "feel" for the game without spending too much money and time.
Get a quality (I recommend Bose) 5.1 surround sound system and a good sound card.
With the rest of the cash (if there is any left) go buy any RAM upgrades and Graphics upgrades you can afford. With that, you should be able to smoothly run a highly modified FS9 or even FSX.
I know these aren't software upgrades, as most have recommended, but I have never purchased payware for FS9 and have had a fine realistic experience with freeware, the only payware thing I would recommend would be payware scenery and traffic upgrades.