I prefer the "total system" cost approach. This method is by no means the only method. When starting out with modest total budget of around $150 or less, allocate all funds to the headphone. Headphones in this price range will be easy to drive and won't require an amp or DAC. In fact, using a cheap external amp or DAC may make things sounds worse. With budget of a few hundred dollars, get the best headphone you can get and an amp to power them properly. Don't bother with a DAC, unless you can score one for cheap. Once you get into entry level audiophile of about $1000, get the headphone you want, and split the difference between amp and DAC with a little bit more on the amp. Once you start getting serious in the thousands of dollars, get the headphone you want, but go for an even split between amp and DAC. I tend to see many sub-optimal systems at meets where people do not have DACs which can take advantage of the headphones and amps being used. This is when source starts to matter. Once you start building an end-game setup, source becomes king. My reasoning for the above is as follows: Headphones will be the most colored piece of gear in the audio chain. We can discuss this all day, so we won't. Pick this first for obvious reasons. DACs sound closer to each other than not. Differences between DACs are more easily heard with more resolving gear. Thus don't bother with DACs at the low end or even entry level. Use what you have handy or can get for free from friends (iRiver Soviet iPod, sound card, old HeadRoom BitHead).* As we move up to higher fidelity headphones, the immediate weak link seems to be amplifiers. Many headphones, such as high efficiency orthos and moderate efficiency traditional dynamics, love amplifiers that can provide clarity, power, control, dynamics, articulation. There are some exceptions: Grados and certain Audio Technicas, because of their super efficiency, may not sound any better with an amp. These kinds of headphones require extremely resolving amps, not necessarily power. But in general, more power is better, but only if we can maintain resolution, clarity, low distortion, etc. At some point, a setup in the thousands of dollars, the source starts to become more important, as important as the amp or even slightly more, just in case. IMO, in the initial or medium stages, source should take a back seat to the amp because an amp's sonic colorations are more obvious. Finally, for some headphones, spending more on amps won't matter after some point. They won't scale. All you will get is something "different" (nothing wrong with that, just be cognizant of it and don't let HF convince you otherwise). Same thing for amps. After some point, DACs won't matter if your amp can't reveal the nuances of what the better DACs are capable of doing. The above, #2 and #5 is why Gary at HF didn't find any distinguishable differences between most of the DACs he auditioned. He used an LCD3 (presumably degraded) and a speaker amp. Some headphones like the Sennheiser HD6x0, HD800 scale like mad. Don't bother sidegrading with more headphones. Get good advice** on better amps and source to bring these headphones to their full potential. Another approach is source first. Maybe a small business in a nice small town just north of El Lay made a kick ass DAC (or two) which is universally agreed by everyone as to have an extremely high performance/price ratio. Might be a good idea to start with that. * As an aside, because of #1 and #2, so called "objectivists" claim there are no DAC differences if three or four measurements don't show non-linear behavior past audible thresholds. Of course this has nothing to do with science since 1) these "objectivists" have not heard any of the gear in question; 2) they have not conducted experiments to support their hypotheses. They demand experiments of high rigor (DBT, 0.01db volume matching, etc.) from those who they disagree with, while accepting less rigorous "experiments" (anecdotes) from those they agree with: "I conducted a blind test of the ODAC and the Benchmark DAC1 and I couldn't tell the difference from my Objective 2 amp, which we all know is nearly perfect and transparent". ** Don't sidegrade amps or DACs either. A lot of gear hyped on HF as the latest and greatest is actually pretty craptastic.