Finally, at the beginning you'll do just fine with a basic set of router bits that run ~$40. A starter set will typically include straight bits for edge matching material, a selection of edge finishing bits, and some joinery bits. As you work on a few projects you may find that more specialized bits are needed. But specialized bits are expensive - so purchasing them as you have a specific need makes more sense than buying in anticipation of a need.
The router—The router is the master when it comes to flexibility. Its potential far exceeds trimming and decorative edge treatments. A router will cut mortises, rabbets, and dadoes, and adding a router table builds in even more versatility, including biscuit joinery and raised-panel doors. But where the router distinguishes itself from all other tools is in its ability to produce identical parts using a pattern.
We use a Dewalt 20V drill. It’s kind of embarrassing how much I love this drill. I got so used to having a crappy one, that once I got a good one, I was hooked on it. While you are getting the drill, don’t forget drill bits. Don’t cheap out on those either. Trust me. You will use a drill on almost every project, so the investment is definitely worth it.
Just how small? Will you have an extra bedroom for your shop or will you be doing woodworking in your living room? Do you have to put the projects and tools away every time you want to entertain or will you leave everything set up all the time? A while back FWW had a video tour of a shop in Japan that was smaller than small. I'll try to find it and get back. Found it... shows what can be done in a small space but this shop was not on a small budget so no help there.
Every woodworker needs a couple of levels. You probably won’t need one of the 6-foot levels used in construction, but 48” is a good length for many of the woodworking projects you’ll do. Usually, you’ll also need an 8” level too, usually known as a torpedo level. You’ll check the level and plum of your construction. Level means horizontal, and plumb is vertical.
There are some diverging paths that you could take at this point: some may want to get a router with a router table for edge work and improved joinery capabilities, some may want to start looking at some of the interesting 3rd party jigs - two of my favorites are the DowelMax and the Kreg Pocket System, but my recommendation would be to equip yourself to buy cheap stock.
How about a hunk of butcher block counter top on a 4X4 (legs) base on locking wheels. Round over the good side and it is a rolling kitchen stand - chopping block - island. Flip the top over, lock the wheels, and it's a bench. There is a vise that is sold by Woodcraft that drops onto a mounted post in both vert and horiz positions that would be perfect for a small flip top bench. The post would be mounted to the underside, unseen till the top was flipped and the vise dropped on. It pivots but when the jaws are clamped it is tight.