The bus is by far the cheapest option, yes, and it's also very flexible (often you can change your itinerary on the same day). However long bus rides aren't deemed very comfortable by most people. It would be good for a budget vacation but anything above that I'd take the train preferably.
Whether the interrail is a good deal depends entirely on how much you'll be travelling around, of course. And also on where you are taking the train; in Scandinavia, Germany etc. the train is very expensive, while in eastern europe it's generally quite cheap.