Regarding hostels...My partner and I stayed mostly in hostels while traveling in Ireland last August. Some hostels were really pretty good, others not. It was not unusual to have a pretty crappy bed, or no hot water. We had a guidebook and so were staying at the supposedly better hostels. The other thing to keep in mind, which since we were unprepared, came as a bit of a shock--some smaller hostels are coed. Imagine our surprise to find men sleeping 4 feet from our heads! Also, if the rooms are larger, sleeping at least ten people, like some of the hostels in Dublin, it can be hard to get to sleep, as there is a lot of coming and going, and people on different schedules than you. One last piece of advice if you stay in a hostel: always pick a bottom bunk!
I found while travelling in Spain, Italy and Scotland last summer that the average age of people staying in hostels and pensions was a lot closer to my 30 than I'd expected! Some of them have single or double rooms if you want privacy for your partner and you, though of course they typically come with two single beds. And the ones with 4 or 6 beds in a room were, I thought, also pretty nice -- or at any rate, you could find nice ones, though of course there are also icky hostels everywhere. I found the Let's Go guides for Spain and Italy to be useful in selecting places that felt safe, clean and comfortable.
You'd probably be surprised at how comfortable it can be to stay in a 4 or 6 person "dorm" style room (often w/ bunkbeds), given how little time you'll spend in the room anyway, and most hostels have kitchens and TV rooms you can use. Maybe others should share hostel experiences (good and bad) to help give some perspective on what this means of budget travel is like. Heck, I'd rather pay for good food or good cultural events and not blow all my money on a place to shower and sleep! But everyone has different preferences and tastes, so I'm sure it's not for everyone.