I use a pair of Ortlieb Sport Packer Plus for daily needs, they're not huge but each one has the capacity to hold a few college sized textbooks. I don't really need two of them most days, but I can't stand riding lopsided, so I'll put a few items in each. A pair of Ortlieb Bike Packer Plus is what I use for grocery trips, they are large enough that I can generallly hold about 40 lbs of groceries between the two of them, enough to last me a few weeks.

These Ortlieb bags are probably on the pricier end of pannier bags (thought Best Buy had was selling certain ones of them half-off a few months ago; sadly, all good things must come to an end), but the bags are practically bombproof, take only 3-5 seconds to mount and unmount (which is a plus for mechanical clutzes like me), and never bounce off the bike because you hit a bump. To top it all off, they're waterproof!

My set of four panniers cost $300 from thetouringstore.com (that price was including a nice military discount that I didn't even ask for) but is worth it because they will probably last me a lifetime.

My bag setup works for me because I can carry a lot of gear very low on the bike without riding lopsided, because the bags are intrinsically waterproof so I don't have to worry about waterproofing their contents, and because they are very easy to mount/dismount.

My old setup was a milk crate on top of the rack and a wire crate hanging low on one side of the rack; the result was that I could carry a large amount of cargo, but most of my weight was carried up high (making the bicycle more unstable due to having a higher center of gravity) or off to one side (making the bicycle lopsided). For touring applications, I would put a wire crate on each side of the rack to balance it out, but I found that this setup just made the bike too wide (and too heavy) for everyday use, since the wire crates were held on with hose clamps and not easily removable.

The three year old photo of my bike below shows my old old short-tour setup: an Army rucksack simply bungee-corded to the rear rack!