I'm going to concentrate here on backing up your data (in which I include photos, videos, music, and so on), because that's your top priority. Should your hard drive die, you can reinstall Windows and your applications. You can't reinstall your tax records or your children's baby pictures.
Any decent backup program should know what files and folders need to be backed up. But just in case, here are the likely candidates in Windows XP. All of these folders reside inside C:\Documents and Settings\login, where login is the name you use when you log into Windows:
- My Documents
- Desktop
- Application Data
- Favorites
- Local Settings\Application Data
And in Vista, where you can find these folders inside C:\Users\login:
- Documents
- Pictures
- Desktop
- Music
- Contacts
- Videos
- AppData
- Favorites
You should back up every day that you use your computer. An intelligent backup program will, on most days, only back up files that have been created or changed since the last backup.
One more general rule: Your backup should be physically separated from your computer. A backup that will be robbed or destroyed along with the rest of the computer is not a secure backup.
I recommend backing up to an external hard drive if you think you can develop the backup habit, and to the Internet if you want to set up an automated system and forget about it. Although you can set up automated backups with external drives (most backup programs assume that this is your first choice), it's not really a good fit. Either you have to remember to plug in the drive at the right time (so much for unattended backups), or keep the drive plugged in at all times, which means your backup isn't physically separated from your computer.
On the other hand, automated online backups make a perfect fit. And physical separation between your hard drive and the backup is as great as it can get. The problem: It's slow--horribly, horribly slow. Your first full backup can take days. Fortunately, it won't keep you from working during the backup.
If you go with an external hard drive, check out the backup software that comes with it. If you don't like 
it, I recommend Genie-Soft Backup Manager ($50 Home version, $70 Pro), which is remarkably easy and versatile. It can also do system backups. If you'd rather not spend that much, the $25 Argentum Backup is easy and versatile enough, although not in Genie's league.
For online backup, I recommend Mozy Home. For $5 a month, it will automately backup all the data you can fit on a single PC's hard drive.
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