Where else other than Madrid?

You might consider Valladolid, which is about an hour northwest of Madrid by train. I was there some years ago and it’s a lovely city with a lot to see and do. And I would imagine, although I don’t know for sure, that it would be considerably cheaper than Madrid.

Or you might consider Costa de la Luz or possibly Valencia, which are farther south, if you’re looking for warm weather. Both should be cheaper than Madrid. Costa de la Luz is on the coast and has beautiful beaches.

Madrid is my least favorite place in Spain. It looks like Barcelona and Seville are each approximately 2:30 by train from Madrid. I would suggest you take a look at those.

Have you been to Spain before? Madrid? Madrid is a pretty city, but if you aren't interested in the museums, I think other areas of Spain are far more atmospheric and cultural. This time of year, I think I'd go to Andalusia. Sevilla, Cordoba are a quick train ride from Madrid. Barcelona is close by train, too. I really liked Barcelona and the neighboring cities that we visited, but I felt it was more expensive than Madrid.

For pricing, consider looking at places away from the major urban areas that most tourists gravitate to. As mentioned Valladolid is an option as are Logroño, Manzanares, Plasencia, Trujillo, or Zamora. There are others.

I believe Madrid and Barcelona have the most expensive hotels in the country, as a general rule.

From the weather standpoint I'd prefer the south at this time of year. Take a look at lodging costs in Cordoba and Seville. If you want the coast, Malaga can be considered. Seville has the largest number of sights among those cities, I think. I don't know how lodging costs will compare.

Don't forget to check rail fares. They can get rather high for late purchases. Cordoba will be cheapest, then Seville, then Malaga--assuming you take express trains.

I wonder whether lodging costs might be lower in Alcala de Henares than in Madrid. Alcala is virtually a suburb; it's connected to Madrid by cheap, frequent commuter trains. It's an historic university town with an attractive historic center. You'd be close enough to Madrid to commute in for sightseeing.

Madrid has the Prado and some historical sites, but nearby Toledo is FANTASTIC. It was Spain's capital until 500 years ago when it was moved to Madrid. Therefore, the city is pretty much preserved its medieval charm. It is my favorite city in Spain. You can do a day trip from Madrid or stay there (recommend two nights).
Also, Segovia and Avila, north and northwest of Madrid can be done in a full day.

The best alternative outside of central Spain is go south to Cordoba and especially Seville. Seville is wonderful..

Consider doing Sevilla-Granada-Barcelona-Madrid (before your flight back home).
Fly/train to Sevilla the same day you land in Madrid leaving all your Madrid days for the end.
Three nights in each will give you a flavor for each city if you don't try to see everything.

I'd seek out recommendations for neighborhoods in Madrid where you might target your search. I am sure other towns would be less expensive, but some Madrid suburbs might be comparable with the rates in some of these attractive cities. And the transport ease you would give up may not be worth it.
I usually target my searches at around 100 euros per night when I am on vacation, so that is a normal rate.
Just based on some of my past trips or tentative trip plans, I'd say try Tarragona.

You would have to add the train/bus cost to go to/from Madrid to Estepona, but it looks like there’s some much less i expensive options there, plus you’re in a warmer area.

I find you get better answers when you are more specific or have done your homework a bit. There are hundreds of lovely alternatives to Madrid. Clicking around Google Maps is one way I find places of interest.

Focus on a region to narrow it down. Most people will just parrot the same old locations: Sevilla, Granada, Barcelona, you name it.

This is kinda funny, as most people in my generation have no guarantee of even retiring. Boomers complaining about high prices in EU after traveling for 7 months to exotic locations and then retreating to their 2nd home.

There is a reason that Sevilla comes up a lot, and not that we're just a boring bunch, just sayin. . .

Go to a non-tourist city that isn’t close to the beach. That’s going to be the cheapest.

But, I’m sorry, you will struggle with a house or an apartment for $30 a night. It’s not crazy that Western Europe is more expensive than Thailand. It seems like common knowledge to me.

Mexico and Thailand have less than half the PPP adjusted GDP per capita of Spain. It’s going to be more expensive just like staying in Southern California would be more expensive than Spain.

We want to thank everyone that has commented on this post. We have decided to go to Cordoba and spend all of our time in Spain there.

Our plane lands in Madrid at 20:00 and it seems as though the last train (Aeropuerto Madrid Barajas T4. Metro) departs 20:30. Would you suggest we stay in an inexpensive airport hotel for the night or train to another inexpensive hotel, closer to a train station such as Estación De Tren Madrid-Nuevos Ministerios and take that train (with a few transfers), in the morning?

I'm trying to do this research on my own but to be honest, my brain is fried from being on the road for so long, I have travel fatigue. Usually it works on autopilot and it's failing me on the final lap. Thank you for any help.