I usually edit with gvim, and test in an xterm alongside.

I've used screen before, that also works well.

It's all a matter of personal preference, of course. There's no wrong answer.

Insert a "now if only emacs had a good editor, it'd be the answer" joke here :)

Emacs does actually have a good terminal mode, so if you can stand using it to edit, it is a good choice.