Word of mouth has been my greatest advertising and I think many here will also agree.Everytime a cake goes out to a party...many others see it and some ultimately want one too.I get referrals all the time!! You can advertise in paper,flyers,brichure,business cards etc but it took me about 2 years before I began to go full steam ahead and booked every weekend.
Definitely word of mouth, and secondly a nice professional looking website with its own URL (not using a free site that uses its own name before yours).
I have tried a few other (pricey!) methods of advertising, but it always comes back to "I was at a party with one of your cakes the other day..." or "I found your website online...."
Its also taken me time to get my name around. Its a big area and I have alot of competition....but its coming!!!! Every year is busier than the year before.
I run a bakery out of my home and the best thing I ever did was get a dedicated business line. For about the same price of a home land line I was able to get a new number and have it listed in the yellow pages under bakeries and on yellowpages.com. I needed a phone anyways so it isn't really any extra money for me. 
A very large number of my customers have found me because of that. It helps too that I was able to get 2253 (CAKE) as the last 4 digits 
Word of mouth has been my best advertisement.
Next was having a booth at our town's fall festival. It was only $100, but I ended up getting 5 wedding cake orders and around 10 party cake orders from it.
A website does help also as PP mentioned.
I also always have business cards handy when someone asks about my cakes.
Word o' mouth! I'm just getting started myself, but things are rolling in for me. I'm working hard on getting the word out that I'm doing this. I still have a full time job, and I bring in cookies, etc. frequently for co-workers - most of my jobs have come directly from them or from referrals from them. I also have a friend who owns a salon and spa - I brought cookies for her to have at the front counter, with copies of my business cards, and have gotten quite a few jobs from there.
cupcake 900,
I am a home baker too. Did you have to pay to have your number listed? I tried to get my number listed and they said the cheapest price they could give me was $60 a month. I thought that was way too high.
Word of mouth, definitely...full, lip-smackin', satisfied mouth. 
Word of mouth is my biggest advertisement! Also having a nice professional website and business cards handy. I also send cupcakes and goodies to every school function I can.
Definitely word of mouth through the years has been my best advertisement also.
Just a word of caution............after reading about all the unlicensed bakers posting on Craig's list and other sites on the web, don't advertise until you are a legitimate, licensed and insured business.
It seems like there are a lot of cake police out there nowadays just looking to turn people in. It's not worth the risk.
cupcake 900,
I am a home baker too. Did you have to pay to have your number listed? I tried to get my number listed and they said the cheapest price they could give me was $60 a month. I thought that was way too high.
I called AT&T and asked to be set up with a business line. They have a small business account that is unlimited local calling with free call waiting, caller ID, and call forwarding (which I use all the time when I'm not home to forward to my cell because you can turn it on and off whenever you want) and with all the taxes and fees it is $52.00 a month. With that they also give me a free listing in the yellow pages under bakeries. It's just my business name and phone number, but it comes automatically with the business line. The girl I talked to was really nice and she even let me pick my own phone number and everything.
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