Machu Picchu

If you are going during the off season, do not book a hotel ahead of time in Aguas Calientes, the town at the base of machu Picchu. When you get into town, there will be lots of people offering you rooms. Ignore them. Walk into town and then start going from hotel to hotel asking how much a room is, what is included (bathroom, hot water, breakfast), and always ask to see the room. Within seeing two or three rooms, you will have an idea of what your money will buy you and what you are willing to afford. For example, when we were there in September 2008, we walked around and asked about a few different hotels. The one we chose was a clean, yet sparsely decorated room with a private bath for $15 a night. We would not have found this if we would have taken the first place we found nor if we had booked in advance via the internet (some hotels and guesthouses don’t have websites but that doesn’t mean there is anything wrong with them). This same idea works with restaurants. Look at menus at a few different restaurants before choosing one. You’ll be able to get a feel for how much dishes cost and won’t get trapped in an expensive restaurant.

Madrid

Madrid is the place for eating, drinking, and wandering. There are great tapas bars, wine bars, and restaurants all over the city. My favorite was El Tempranillo in La Latina, C/ Cava Baja, 38, west of the La Latina metro stop. Their wine selection was amazing and their tapas were delicious (especially the roasted veggies with melted goat cheese). On this same street, there are a handful of other great tapas bars. Check out this other blog for lists of great tapas bars in La Latina and around Madrid: http://tapastalk.wordpress.com/tapas-bars/

There's a great restaurant called Bazaar, C/ San Marcos, 35, just south of the Chuenca metro stop (http://www.restaurantbazaar.com/). The food has an international flavor to it; some Spanish, some Asian flavors but all around good. The prices aren’t too bad either, about 6-10€ per plate, and they have great wines (including house wines).
Last recommendation. San Antón (http://www.mercadosananton.com/) and San Miguel (http://www.mercadodesanmiguel.es/) markets are great places to eat some delicious food, but it's an even better deal to take some to go. If you are staying in an apartment or going on a picnic in Retiro Park (which I highly recommend), pop into either market. Buy a little of this and a little of that and you will be amazed at the quality of food you get for just a few euros. American readers, please remember that one pound equals 453 grams, so 100 grams of cheese is enough for a good snack for a few people or to last a few days. Add a bottle or two of wine from a grocery store (for as low as 1€) and you're good to go.
To get in and out of the city, there is an express bus from the airport to Cibeles (Banco de Espana metro stop) and Atocha (Atocha metro stop) for 2€ each way. It’s easy and quick, the driver can provide change, and, best of all, you don’t have to transfer in any of the many metro stations. Check out this site for more information: http://www.esmadrid.com/en/barajas-airport-express
Also, one other tip about Madrid’s metro system: when you look at the system map, the city seems quite spread out and possibly unmanageable. In actuality, the metro stations are closer to each other than one would think (some as little as 3-5 minutes on foot). I recommend that in the first day or two you are in Madrid, don’t buy the 10 ticket metro pass. Figure out where you think you want to go in the city, how much walking you are willing to do, and go from there.