Yo Will, welcome to the board! First, don't spend money yet. You aren't ready, and your budget is way too small to waste. You don't know enough yet to understand some of the answers to your questions. I'll try to sort out *some* of it. And understand that whatever I say is just my opinion, and someone else could disagree and be right also.
As far as I understand it, the 488 only has preamps on channels 1-4. 1 and 2 have XLR ins with available phantom power. Channels 3 and 4 have balanced 1/4" inputs, and can be configured to accept mic or line level inputs, no phantom power. Channels 5-8 only accept a line level signal (no preamps) so you can't plug mics into them without an outboard preamp. This doesn't matter much, as it only records up to 4 channels simultaneously. You have already figured this out if you RTFM. I provide this info mainly for other people who are trying to help you out.
Historically, trap/drum sets (hand drums are a different ballgame) are recorded using sensitive mics overhead, looking down at the set, usually a pair, and 2 or more "spot" mics, which are placed closer to the drum/high hat/whatever they are on. The main ones are the snare and the kick drum. Many people still use this relatively simple arrangement, especially in jazz and Bluegrass. The big metal rockers love to put a mic on every blessed crash, ride, wood block, cowbell, etc. Some of them use 18 mics or more, so there's barely room to swing the sticks. The overhead/overheads are the key, as they get an overall picture of the sound from above. Then spot mics are used to bring out (mix up) specific drums. Sometimes 1 or 2 condensers in front of the kit will be used instead of or in combination with overheads. This was more common in the day (the 1950's and early 1960's).
I would say you need 3 mics, and 4 would be much better. You have a very small budget, it would appear, so don't buy anything new that you can buy used. ebay is your friend.
First, the headphones- I happen to like Sennheiser HD280, which I think is in your price range, depending on where you are located. The isolation is excellent for tracking.
Next the mics- I am quoting wicked cheap here:
First the overheads. Do a search on Naiant mics, Behringer ECM8000, Behringer B-5, Marshall Electronics MXL603. Small diaphragm condenser mics, often used for overheads, can range from $30 to $6,000 for the pair. Is there a difference? Hell, yes. You have to get some tools to crawl with, before you can walk. For good mid-priced overheads, I like Studio Projects C-4 and Rode NT-5. Both are a little over $300 for the pair, new.
For the kick, this is where you have to bite the bullet and find a dedicated low frequency mic. For kick, I mostly use AKG D112 (for classic sounds, blues, etc.) or Audix D6 (More clicky modern sound with a sharper Attack.) Some folks like Shure Beta 52. Any of these is about $200 new, $100 used. I like the D112 because it's good for recording a lot of stuff other than kick drum. It's a rather good all-around dynamic mic.
Lastly, snare. Of course, the inescapable classic is that Shure SM57. My general attitude toward this mic is "so what"? It's a cheap, reliable dynamic, and yes, for recording certain things (snare and guitar amps in particular), a cheap dynamic mic is just what you need. There are *lots* of cheap dynamic mics that work fine for cabs, percussion, and some vocals. You are also talking about acoustic guitar. In general, a cheap dynamic is not the best choice for acoustic instruments. For a cheap dynamic, I like AKG D770 (discontinued but you can still find them new or used, for cheap), Sennheiser e835, and amazingly, the Behringer XM8500 ($20 new!!).
So what would I do with almost no money? I'd grab one good condenser mic that I could use as an overhead, and on acoustic. I would choose a large diaphragm so that it would be usable as a vocal mic also. I would grab a cheap dynamic- I'm not kidding, the XM8500 will work quite well on snare and cabs. If you see a used SM57/D770/e835 for cheap, grab it. They are all over ebay. Be wary of SM57's on ebay that seem too cheap. There are many Chinese fakes. That's one reason I like AKG D770. They are usually the real thing.
Then when you have the bucks, add a kick mic. Next, consider adding one of those little Naiant mics down the road. They are omnidirectional/omnis. You could use one of them as a single overhead and put the other condenser in front, then add kick and snare. Remember, you only have 2 inputs with phantom power, which mostly means only 2 condensers at a time. For placing mics, do a search on "recorderman". You may find it helpful.
So in summary, if you get only 1 mic, use a condenser as a single overhead. Omni is good for this.
If you get 2 mics, get 2 condensers and use them as dual overheads, maybe in stereo, maybe not. Usually done (but not always) with directional/cardioid mics.
If you get 3 mics- listen to the mix from the overheads and place a dynamic to bring out what you don't hear enough of. It can be on the snare, on the kick, or between the two, to get some of both.
If you get 4 mics- Life is good- 2 overheads, one kick, one snare.
If you have 28 mics- You can record the Anthrax/Black Flag tribute album. Drugs, sex, and blood. Well you had to get something for buying all the stands, clips, cables, and the board from Hell to do it on, right?
A few tips- Get the drummer on something hard, elevated if possible. Nothing sucks up the sound of a snare like a carpeted floor. Next- *tune the damned drums*. That can have a bigger effect than any kind of mic technique. Lastly- what you'll eventually find out is that a good sounding room is easier to find than to build. But whether you find one or build one, without it, you will always be semi-screwed. Eventually, you will work your way back to the room, and that will be what is holding you back. The worse the room is, the sooner you will reach that realization.
Regarding monitors- they are a wonderful thing, but not yet in your budget, I fear. For most practical purposes, $500 for the pair is barely enough to get started. Use the best home stereo amp and speakers you can lay your hands on until you can afford real monitors. Get at least one set of good closed back headphones. They are mission critical. Best of Luck-Richie
I'll keep the board posted!