3. You mentioned that one of your interests is shots of your grandkids. Mine as well. For that, I consider a bounce-capable flash to be essential. I have used Canon 430 EXII flashes for years, but there are some good off brands as well. Ideally, spend $30 or so and add a bounce card, like a Demb flip-it. This is a discussion for another thread, but I would take the cost of a flash right off the top in deciding how much you can spend on other things.
4. Given your budget, I would buy refurbished gear. Canon won't refurbish gear unless they can bring it to near-new condition, and they guarantee all of it. I would have to check, but I believe they have extended the warranty from 90 days to 1 year, at least on some equipment. I am including lenses as well as bodies. My most used lens is an EF 24-105 f/4 that I bought as a refurb 3 or 4 years ago. It's been flawless. I would avoid used gear unless you know who is selling it or you get a warranty, as you would from some vendors (e.g., Adorama and I think B&H and KEH, the largest vendor of used gear). I generally opt for refurbs when I don't buy new, sometimes waiting for a Canon sale.