My home network configuration is as such - my gateway has a built-in firewall and my computers have their own firewalls too. So far it's working fine.
Do I need to install a software firewall when I already have a hardware/ appliance firewall? What are the best configurations for a firewall setup?
It is recommended that you do so, especially for home users. This is because there is an added layer of protection - if malware somehow gets through the hardware firewall, the software firewall is still there to provide protection.
There really are two major types of "directional" malware: those that are "inbound" and those that are "outbound" There is no question that a hardware firewall does a great job of protection a LAN from inbound threats, e.g., port scans. However due to hardware firewalls' inherent design, they do not provide protection from outbound threats, e.g., Trojan backdoors for an example. Software firewalls, or HIPS, which can provide software specific protection, are far more effective in protecting systems from outbound threats. It is the correct combination of both types of firewall protection that offer the greatest protection. The bottomline is that the end user- you, are the greatest factor in protecting your system from malware. Safe browsing, intelligent limiting of personal information, educating yourself and understanding the nature of malware threats, keeping your security suites up to date, etc., provides the greatest protection.