Just copy whole directory trees to an external hard drive or two, and maybe a remote FTP site, for extra safety. Nothing compressed or encrypted, because it requires some special software to restore, and at the critical time when a restoration is needed, it may refuse to do it.
I learned this the hard way last night when our iMac became unusable after a crashed software update (long story, told below in short form). I eventually had to wipe the hard drive clean and reinstall the operating system and everything else. I felt it was OK to do so, since I was using Apple’s Backup software religiously every week for documents, photos, and so on. Bah! It won’t restore those backups now, instead it gives me an obscure error message. I’ll try to get some help from Apple about this tomorrow, but I was able to restore a lot from straight copies I had made by dragging to external drives, not least in order to populate the iPhoto library of M’s newish MacBook. Still, some photos were lost, as well as the iTunes library on that machine, but the latter still lives in the iPod.
It was M who found online this morning the real solution, though, just as I was getting desperate because even after the reinstallation, the OS updated itself back into a tremendously sluggish state. It turns out that the update to OS X version 10.4.10 can introduce the sluggishness, where a single click may take two or three minutes to register, and applications go on seemingly frozen for very long periods of time. What one should do in that case is to be patient until given a chance to shut down from the Apple menu (especially if pressing the power on/off button will interrupt another software update on its way—doh! I’ll never do this again). Once the Mac is shut down, boot it in safe mode (press SHIFT while booting) and wait, waaaaaaait, waaaaaaaaaaaaaaaaaait until it finally boots up. Then shut down from the Apple menu again, and boot up regularly. It should be fine. At least, that’s what M found online, and our iMac behaved exactly this way (I am not kidding about the waaaaaait, it took about 25 minutes for that safe-mode boot to finish).