Whether you use Windows or Linux, there is something fantastic about having a dedicated data partition rather than keeping all of your user data on the same partition as your OS. For Windows XP users, this means following this LifeHacker article for a better understanding on how to do this with XP and Vista.
For Ubuntu Linux users, setting a dedicated home partition could not be easier. Just do this with the first install of the OS, using advanced partitioning as one of the option. Create three partitions. One swap, one as /Home/ and the last one as the / directory.
The benefits of doing this are tremendous. Reinstalling a fresh copy of the OS may mean reinstalling the software, but once reinstalled, the data partition remembers all of your user settings. This is a massive time saver. But there is also one other thing to consider when taking this approach, considering using a separate hard drive. Bundling this approach with the separate partition, you have extra insurance in case of outright hardware failure.
Still at the end of the day, using a separate hard drive is not a replacement for solid off-site backup. Then again, doing both can make for a fairly decent way to keep your computing life as sane as possible.