I think it really depends on what your goals are. If you plan on playing in a band and or starting a career in music, then yeah, it makes much more sense to save a little more for much better goods. If you are just looking for something to get you started, dont want to, or really cant spend quite so much money, but want good feel and decent tone then i dont think going for a guitar in the $500 range is that bad of an idea.
In my case, I went and bargained with a guy and got a Shecter C-1 for $450 (early 2003). I was just starting guitar after playing drums (didnt know a whole lot about guitar hardware at the time) so i didnt want to plop down two grand on something i was uncertain about, especially because i had other costs such as the amp, pedals, ect.
Looking back it wasnt a bad decision. Maybe in the long term it would have been better to buy something nicer, but thats hindight. Something like the C-1 class is a solid guitar and plays well. Also, a nicer guitar's tone would have gone to waste on my little 30 watt amp... again, it depends on your siutation.