In short, you need to back up all of your files. You also need to encrypt the ones containing sensitive information. And the encrypted files need to remain encrypted in the backup.
Most commercial backup programs have an encryption option; some free ones do, as well. But I don’t bother with encrypting my backup.
If you’re worried about someone stealing your external drive and reading your sensitive files, you should also worry about someone stealing your PC and doing the same thing. And that means you need to encrypt your sensitive files on your internal drive. And if you pick the right tool for encrypting them there, the backup will be automatically encrypted.
One important thing to remember is that you don’t have to encrypt everything. You only need to encrypt legal documents, tax forms, and anything else that requires real security. Criminals with access to your vacation photos aren’t going to hurt you.
Consider protecting your sensitive files with TrueCrypt. You can use this free, open-source program to encrypt an entire partition or drive, but that’s not what I recommend doing (or do myself). Instead, create an encrypted TrueCrypt volume. When open, the volume appears to Windows as another partition. When closed, it’s a file full of gobbledygook that can only be opened with the password.
Keep your TrueCrypt volume file in a folder that’s part of your regular backup routine, such as My Documents. The TrueCrypt file and everything inside it will get backed up. But those files will be useless without the password.
