I always made my kids' costumes when they were little, and then we would make them together as they got older. I let the kids' imaginations guide our creations, but drew the line at anything really gory. We shopped at Goodwill, Salvation Army, the fabric store, and children's resale shops for supplies. Most costumes cost under $10 to make. Some of the more memorable costumes we've made over the years were:
DS (1 yr old) was a calf, I was a cow (hand made, before you could buy cow outfits off the rack), DH was the farmer
DS (2 yrs) was the terrible twos: Oscar the Grouch and Cookie Monster (two stuffed heads sewn onto a sweat shirt)
DD (2 yrs) was Queen Celeste from Babar
DS (6 yrs) was a one-eyed, one-horned flying purple people eater
DS (9 yrs) was the Hydra from Greek mythology (painted a green sweat suit to look like a snake, made multiple heads out of papier mache and stuck them on dryer venting sewn onto the sweat shirt and attached to the hood, which was the largest head)
DD (5 yrs) was a bird in a nest (recycled parts of the people eater costume)
DD (6 yrs) was a hypogriff from Harry Potter (required LOTS of feathers and hot glue!)
DD (7 yrs and 9 yrs) was Hermione Granger in her Gryffendor gray-wool uniform and black robe. The most challenging part was creating the school seal on the robe. (A friend helped me paint it.) We altered a vest and skirt from Goodwill to make the uniform and bought a black choir robe from Goodwill for the robe.
DD (12 yrs) was one of the astronauts from Alien, complete with a springloaded alien that jumped out of a panel sewn into the front of his spacesuit. We used a jumpsuit he had gotten at space camp the summer before to make this one.
DS (13 yrs) was Zaphod Bebblebrox (President of the Universe from Hitchhiker's guide to the galaxy: 2 heads, 3 arms). Definitely the best one we every made. I made a full size head from a wig stand and papier mache, painted it to look like him (as best I could) and added a wig to simulate real hair. DS made a prosthetic, moveable arm from Knex, which I sewed into an extra sleeve and added to a jacket we bought at Goodwill. He used it to hold his Trick or Treat bag, and raised the arm using a pulley system he rigged up in his coat to work off of one of his hands.
DD (15yrs) Eliza Doolittle from the Ascot Races scene in My Fair Lady. DD sewed the dress herself, starting with a used wedding gown and adding ribbon and trim to it and a large floppy sun hat.
DD (18yrs) Wood nymph from Greek/Roman mythology. Emphasis, I'm afraid, on the nymph (LoL!) We made this one together right before she left for college a few weeks ago. She sewed the skirt and top from green velvet, added a gold center, lace trim, and gold laces to simulate a rennaisance-era corsett, and sewed gold tulle into slits in the skirt. (I helped with alterations and sewing in the tulle). She also made a beaded tiara from gold jewelry wire and plans to weave in wildflowers. Of course, by the time Halloween rolls around, I kind of hope she's too busy with school to actually wear it (then again, maybe she'll attract a nice boyfriend! :-D).
We also celebrate Purim, a Jewish holiday when people often wear costumes. My personal favorite was when my husband went as Lot (dressed as a CA lottery ticket), and I went as a salt shaker (Lot's wife, of course!).
I think the best part of making your own costumes is the opportunity to be creative, and spark creativity in your kids. You don't have to be a good seamstress -- you can do a lot starting from already made clothing, hot glue, fabric paint, and odds and ends. Have fun!