I've also learned that mpg is not a single thing (it seems obvious now) but there is a motorway and urban rating.
Don't pay too much to the manufacturer ratings on fuel consumption. They tend to over-estimate them quite wildly.
Do check insurance groups before writing cars off. Some of them might surprise you.
Bigger cars will do less well on fuel (and on your budget diesels may not be the best option), but they can be massively cheaper to buy.
Don't scrimp too much on small cars either though. There's some real dogs out there and it's a competitive market for the ultimate cheap runabout. The premium will pay itself back twice over if you get a good one, but you'll pay in comfort too, or lack of.
Don't ever let anyone put you off buying a cheaper car. In 15 years of driving I've only bought one that was over £1k. The rest were well under. Aside from the British ones (Ford and Vauxhall) they've all lived long and fruitful lives. All around the 5 years and 50k miles mark. Some of them weren't even serviced in that time! They all would have lived longer if they weren't neglected. Current motor cost me £750 and after a year of ownership it has just went straight through an MOT. I will add that they've all been Japanese.
Prices have risen a lot in recent years. Lots of one-man traders out there buying cars from ebay/gumtree/etc, only to put them back on ebay/gumtree/etc an hour later but for twice the price. But there's plenty of honest sellers too. I think it pays to seek them out.