On my Windows systems, I use a backup method called "AB+Ghost". The jist of it is that you have a large external hard drive with an on/off switch. On that drive are three folders and one text file. The folders are named "A", "B", and "Ghost". The text file is named "History". Each night, you back up your files to the "A" or "B" folder and alternate which folder you use every night. At the end of the week, you do a full copy of the hard drive using Norton Ghost, which makes a "disk image" of your drive". This is basically like the OS X installation disc, but in a file with all of your programs, settings, and files which you can restore to the primary hard drive like the OS X installation disc. I only do this weekly because it typically takes a long time (couple of hours at most). In OS X I use Carbon Copy Cloner (CCC) instead of Norton Ghost, which is available for free here:
http://www.bombich.com/software/ccc.html
CCC runs on both Intel and PowerPC Macs. I'm still researching good backup programs; on my Windows computers I use a nifty little backup application called "Replicator" from Karen's Power Tools. Otherwise I just copy everything by hand. However, since I don't know where all of the settings and templates and whatnot are stored, I can't do everything by hand yet.
As far as the backup hard drive goes, you can buy one or just build one yourself. I like building them because they're easy, you can save a lot of money, you can choose the enclosure and connections that you want, and you can choose what drive you want. Typically I get Seagate drives because they are usually quiet and are long-lasting (plus have a long warranty). Here is a good enclosure that sports both Firewire 400 and USB 2.0 for under $45:
http://www.newegg.com/Product/Product.asp?Item=N82E16817146602
Here is a 250gb Seagate drive that is very quiet and sells for under $100:
http://www.newegg.com/Product/Product.asp?Item=N82E16822148100
So for about $150 you can get a very nice backup drive. LaCie makes a number of external hard drives, but you're going to pay like $70 more if you want both USB and Firewire with the same capacity as the setup above:
http://www.lacie.com/products/range.htm?id=10033
Anyway, after you get it formatted and create the three folders and text file, you do the following:
Daily: Backup personal files to "A" or "B" folder; log the date in the History text file (like A: 4/9/2006, B: 4/10/2006)
Weekly: Backup system using CCC; log the date in the History text file (you can alternate these as well if you have a large enough backup drive)
Keep the hard drive turned OFF until you need it; this prevents possible problems like a virus eating the drive or a user accidentally deleting files. This backup method ensures that not only do you have a backup, but you also have a backup from the night before just in case you accidentally delete a file or something gets corrupted. It's a bit of work, but you only have to ask yourself how important your files are and how long it would take you to reinstall OS X, customize the system settings, install your programs, update the system and programs, and recreate your files if they were lost to see the importance of it