Keeping sensitive files in .zip archive file also works, provided you use AES encryption. Windows itself doesn’t support AES-encrypted .zip files (it supports standard zip encryption, which is far too easy to hack), but many third-party compression programs support it. You can encrypt and decrypt AES with industry leader WinZip, the free 7-Zip, and others.
TrueCrypt offers several advantages over .zip archives:
First, I find TrueCrypt’s way of working–which involves turning the opened vault into a virtual drive–more secure, especially compared to 7-Zip. When you open a file inside a .zip archive, both WinZip and 7-Zip will decompress and decrypt the file to a temporary folder. When you close the file, 7-Zip merely deletes it, leaving traces that can be recovered by people who don’t have your best interests at heart. WinZip securely wipes the temporary file–a much better solution. But TrueCrypt avoids the problem altogether, since the file remains only in the encrypted vault.
Second, there’s the file-name issue. Sometimes, the file names can provide clues to what’s inside. Anyone with access to an encrypted .zip file can view the file names inside. You only need the password if you try to open, view, or decompress a file. No such problem with TrueCrypt.
Finally, I find TrueCrypt easier to use. Since Windows sees an open TrueCrypt vault as a drive, you can access the files transparently. But you can only access the files in an AES-encrypted .zip file through your compression program.
But there are reasons to stick with .zip archives:
First, the file size is dynamic. Add a file to the archive, and the archive gets bigger. Remove one, and it shrinks. But a TrueCrypt vault has a set size (it is, after all, a virtual drive). So you have to start by making it big enough for everything you might ever put into it.
And finally, if you’re already using .zip archives for this purpose, switching over is itself a hassle.