Please Advise me on Building a System on a Budget

As far as Magnepan goes, yes I would say they're lacking in bass. Even the 3.7's could use a subwoofer. Also you need a really fast sub to integrate it well. The MMG's need a subwoofer for the best experience; however, they're definitely a good introduction to panel speakers. The clarity and imaging will probably be better than anything you can find in a similar price range. I'd recommend solid state power amps and a tube preamp, but there are plenty of options. The TAD Hibachi monoblocks (solid state ~200W/ch into 4 ohms) would work well, sound more "tube-like" than solid state, and you could probably pick up a set on the cheap using up less than 20% of your budget. Essentially the MMG's are there to get you hooked on the Magnepan sound; they want you to start there and eventually decide to move your way up the chain. It's always a good idea to get a feel for the Magnepan sound for yourself, so search around for some reviews and try to find a nearby dealer or owner to audition something in the Magnepan line. However, if you can't find the opportunity to do that, I do suggest giving the MMG home audition a try. You could use them alone for a while, then eventually add a sub, and then after a few years move up to the 1.7's. Or if you don't like them, you just send them back and search for some more traditional speakers.

You've determined your budget, good so far. Now I'd suggest determining what you think you'll need, then what might work in your room, then decide on your speakers, before committing to specific amplification choices.

I almost forgot. Earlier Ivan had mentioned the Peachtree Audio iDac. It's an excellent product, but I'd also suggest trying out the iDecco. The DAC in the iDecco isn't quite as awesome, but it's still very good, the preamp is pretty good too, there's a damn fine headphone amp, and the 30wpc amp is pretty good for the money. You can get the iDecco for a little over $800. I think the DAC alone is worth at least that much. I think you'd have to spend about $500 to beat the headphone amp, and around $1000 to equal or best the preamp. You could probably equal the power amp easily enough, but it's not bad. The combination of the iPod doc with .flac files (of well recorded material) can beat the pants off of some CD players that would consume your entire budget. The iDecco was the 2011 Stereophile budget component of the year, and it was well deserved.

If you got the iDecco, you could have several options You would have a little under $1200 left in your budget (if you bought it new-someone's selling one used here for $680). Here's some build's for you:

System 1:
iDecco = $819 (new)
MMG = $599 (new)
TAD Hibachi monoblocks ~ $350 (used)
Denon 2200 ~100 (used)
speaker cable and interconnects from Blue Jeans cable ~$130
Total : $1958

System 2:
iDecco = 819 (new)
Usher S-520 = 450 (new)
Denon 3910 ~250 (used)
Blue Jeans Cable ~ 100
Total : $1,650

You could easily shave a few hundred buck off the first system by getting everything used or completely forgoing the multi-format disc player. Or, if you want to use the USB input from your computer intead of an iPod, you can find the plain Decco used for under $500.

I actually used the second system in my bedroom for a while and thought it sounded great. The Ushers are a small bookshelf monitor, but they have plenty of punch for their size. The only reason I don't have this system set up right now is because I moved my iDecco into another room with a bigger setup. You could start with just the Peachtree and some bookshelf speakers and then eventually add a better, separate power amp, get some full-range floor-standers, then use the Ushers (or other affordable bookshelves) to start a decent little bedroom system.

I'd also give another heavy recommendation to Vandersteen speakers. I've never owned them myself, but I have a good friend who had the 2CE's and just upgraded to the 3A sigs. They sound great. The 3A's are more than your budget allows, but I know he picked up his first set of 2CE's for under $400 with the stands. If you look around, you can find some great deals out there.

What kind of music do you listen to?

The first thing you do when buiding a system on a budget is to increase your budget.