I personally use Microsoft Picture it! Photo Standard 9...
I think its the best piece of software around thats free and fairly simple to get your head round, whilst still be able to do some good stuff with it. Its pretty fast and very simple to use which is why I use it to edit almost all of my photos... (including selectively colouring / de-colouring etc. on some objects.) Look it up if you want. I've tried Photoshop CS2 and can say that it burns my brain

its so difficult to get to grips with. I suppose if I had the time and money to understand it it may be worth it, but I'd go with this software. It doesn't have the "layer" ability as such, but you can have objects separately, so kinda the same thing... ish... It doesn't completely have the opportunity to go back for everything, but you can easily save layers / objects separately as usual. and ctrl-z is always an option for as far back as you like. If you are slightly careful it doesn't pose any problem at all.
I don't know of any free or cheap software that would have all the features you are talking about, like "smart objects" or layers / a huge array of filters that come unmatched with photoshop. So if you're gonna be needing a new program it may be worth using photoshop and getting a bit more RAM in your computer?

I sound like a microsoft employee

(I could well be up to their standard after having wasted about £30 on useless support help for one of their games. They could not do anything, except guess everything and get me to try it out.)
Anyway Picture it rocks. and its years ahead of ms paint.
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