If you're like me and won't need a ton of space you can get by with a 16 GB USB Drive I'd imagine. Support was added for flash drives not too long ago, but capped at 16 GB for some my$teriou$ reason. I have yet to actually take advantage of this myself so I personally can't weigh in on the speed and performance or anything like that. There's usually always deals for flash drives, and I can guarantee you there will be plenty more come the holidays.
I have seen rumblings here and there to be wary of used or Ebay 360 HDDs, but that's just what I've read. I believe there are methods to convert portions of standard drives so that they will be compatible. Not surprisingly getting caught doing so would get you banned from Live as it's a violation of the ToS agreement (please correct me someone if I'm wrong).
Finally there's actually buying a new proprietary 360 drive in which case I haven't seen a deal on one in my time lurking the forums, at least as best I can recall. If you have a Sears nearby you can try and hit the jackpot and look for a clearance 360 drive.
Well good luck anyways, lol.