The nag about using Selective Startup for troubleshooting purposes predates Windows XP--it first appeared in Win98. All you really need to do is check the box to tell XP not to show it again and you can continue to use Msconfig to prevent programs from starting. A more elegant solution is given in this post. Additionally, many applications have an option to not load at startup which you can reach through an "Options" or "Preferences" listing in their menu bar.
Unlike Windows 9X which restricted resources to 64K, Windows XP makes all installed memory available to applications so that removing startup items (either through msconfig or otherwise) is not nearly as important as it was in earlier OSs. You can take a look at the Commit/Charge: figure in the lower right corner of Task Manager (Ctrl-Alt-Delete) to see how much of your available memory (the denominator) you are currently using (the numerator).